!! !! !! ! ! ! ! ! ! ! ! !! ! !!! Finally, community banks have evolved over not compared as well when rates fell to very low levels (see the study period from being predominantly retail lenders Chart 4.8). !! ! ! ! For the entire study period, the increases in equity capital from external sources.4 When metro community banks with positive earnings retained 60 community banks raise capital from external sources, percent of their net income on a weighted average basis, compared with 48 percent for nonmetro community banks. ! !! !! ! ! ! !! By the end of 2011, the Capital is generally measured relative to a banks assets total risk-based capital ratios for both groups exceeded 15 and risk exposures. ! !! ! ! ! ! ! !! ! ! ! 20% 20% Headquartered in Nonmetro Counties 10% 10% 0% 0% 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: FDIC. ! !! !! !!!! The four largest banking organizations report the largest share of industry assets, with 45 percent; however, they report only 19 percent of the total number of industry offices. !!!!! Those community banks 6 According to the definitions of the lending specialty groups, any bank that shifted out of the baseline groups were regarded as with C&D loans greater than 10 percent of assets cannot belong to the pursuing an alternative lending strategy. ! !!! !!! !! ! !! ! ! ! ! !! !! ! ! ! ! !! Other !! !! ! ! ! !! ! ! ! !! ! !! ! ! One factor that with remaining maturities of five years or more rose from may contribute to a higher yield on earning assets for 19 percent at the end of 2006 to 27 percent at the end of community banks is the nature of their loan portfolios. !! ! ! ! !! ! ! Thus, community banks were more than five times more likely than noncommunity banks to remain in opera- Notwithstanding the sharp decline in the number of tion for the entire 27-year period. ! ! ! Table 5.19 Failure Index: 2006-2011 Community Banks That Pursued C&D and CRE Lending Strategies by Degree of Lending Concentration Shifted to Strategy Already Engaged in Alternative Lending Strategy Between 2000 and 2005 Strategy by 2000 Strategy 1: C&D Loans > 10% of Assets Failure Index: 2006-2011 10 to 20 Percent 1.6 2.4 Concentration of C&D Loans to Assets as of 2005 20 to 30 Percent 4.8 4.4 Greater Than 30 percent 12.8 9.9 Strategy 2: Total CRE Loans > 30% of Assets Failure Index: 2006-2011 30 to 40 Percent 0.9 0.7 Concentration of Total CRE Loans to Assets as of 2005 40 to 50 Percent 1.1 1.6 Greater Than 50 percent 1.1 1.6 Source: FDIC. FDIC Community Banking Study December 2012 53, 56 !! !! ! ! ! FDIC Targeted Research on Community Banks, Avoid Scams While Shopping Online for Bargains, Quarterly Banking Profile for Third Quarter 2022, National Association of Affordable Housing Lenders, FDIC National Survey of Unbanked and Underbanked Households, Quarterly Banking !! ! ! In short, there does in the real estate downturn of the late 2000s. ! ! !!! ! ! ! !! ! Between 1991 through 2011, credit card lines alone account for more than one-third of net loan charge- In the end, the relative advantage that community banks offs at noncommunity banks. ! !! !! ! !! !! !! ! ! !! The Federal Deposit Insurance Corporation (FDIC) is an independent agency ! ! ! !! ! ! ! 4 Service providers assist community banks with processing financial transactions, automating business processes, managing mission-criti- cal information, implementing regulatory requirements, and other essential business processes. !! ! ! !! ! ! ! ! ! ! and 36 percent of the volume of capital raised at noncom- munity banks. ! ! ! ! ! FDIC Community Banking Study December 2012 614, 91 ! ! ! ! ! ! !! Community banks were established in Nigeria to help remedy the rural development problem that has been facing Nigeria since after World War II. ! ! ! ! ! ! !!! ! ! ! !! !! ! !! This compares with a peak net loan and are therefore reviewed separately. ! ! !! !! !! ! ! ! ! Estimate 95% Confidence Source: FDIC. ! ! ! ! Between troubled institutions are able to access external sources of 2008 and 2011, 1,882 community banks that did not capital. ! ! ! ! !! !! ! !!!! ! ! ! ! noncommunity bank assets, were publicly traded or were community bank assets, were in organizations that were subsidiaries of publicly traded companies.3 As a result, the publicly tradedthough typically not on major exchang- shares of these companies tend to be relatively liquid, and es.4 As a result, even the publicly traded shares of their banks have ready access to additional capital community banks tend to be less liquid than the shares through issuance of new shares. ! ! ! ! ! !!! !! ! ! ! !! !! ! ! !!! ! ! Federal government websites often end in .gov or .mil. !! ! ! ! ! ! ! ! !!! ! ! !! !! ! !! ! !! ! !! 0% 0.0 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2006 2007 2008 2009 2010 2011 Source: FDIC. ! ! Community the past 15 years, most community banks in most periods banks also have traditionally incurred lower noninterest have been profitable. ! !! !!! !! ! !! !! ! !! !! ! ! ! ! classes of commercial loans since the beginning of 2006 The Role of C&D Lending at Community CRE loans secured by owner-occupied nonfarm, nonresi- Banks dential properties, CRE loans secured by other nonfarm, The patterns of C&D lending shown in Chart 5.10 nonresidential properties, CRE loans secured by multifam- suggests that C&D lending has been a highly cyclical ily properties, farmland loans, and C&I loans. ! ; !! ! !!!! !!! !!!! ! ! ! ! ! ! ! version posted on December 15, 2020, and from the printed version. In 2011, the top four banking organizations operated at least one office in 43 percent of all U.S. counties. ! ! ! ! ! !!! ! !!!!!! ! !!!! ! In Maine, Vermont, lending specialty tend to have relatively similar geographic New Hampshire, and Massachusetts, mortgage specialists characteristics. ! ! ! ! !!! ! ! !!!! !!! ! ! Not only is construction activity essential to that survived after 2008 were rated 3, 4 or 5 by bank economic activity and the quality of life in local commu- supervisors. ! ! Analysis of the This ensures that the definition is as objective and trans- underlying data shows that these thresholds establish parent as possible, that it can be applied consistently across meaningful levels of basic lending and deposit gathering the 27-year period of the study, and that it can be repli- while still allowing for a degree of diversity in how indi- cated and used by other researchers. ! For this reason, they are often studies rely on various asset size limits in their analysis of considered to be relationship bankers as opposed to community banking trends without actually specifying the transactional bankers.2 This means that they have size that separates community banks from other institu- specialized knowledge of their local community and their tions.4 Others do impose a specific size limit in their defi- customers. ! !! !! show that community banks continue to maintain an Noncommunity Banks Have Gravitated Toward important physical presence in nonmetro areas. ! ! ! The munity banking offices were present. ! !! !! In the FDIC analysis, a banks average cost of producing output is measured as total bank costs divided by bank balance sheet assets. ! !! ! !! more, Robert Adams ! !! ! ! ! ! Additionally, continues to recover, and regulatory reforms are fully the analysis presented in the paper shows that the decline enacted. ! !! Expert Institute Award for Best Legal Tech Blog !! ! !!!! ! ! !! !! ! FDIC Releases Community Banking Study, Supervisory Initiatives. !! ! ! ! ! ! !! ! ! ! ! 20,000 0 Just as banking industry assets have shifted over time away 1987 1990 1993 1996 1999 2002 2005 2008 2011 from community banks and toward noncommunity banks, Source: FDIC. ! ! !! ! ! ! ! ! !!!!! !!! ! ! !! At the same time, a large and abrupt lation remains an important question that presents increase in interest rates also carries risks to institutions substantial challenges. !! ! !! ! ! ! The three five-year intervals from 1991 through 2005 represent a time of comparatively strong performance accompanied with higher average earnings. !!!! ! !! !! ! vidual banks rather than to all banks in a banking organi- zation; that is, at the charter level rather than the banking This relationship approach to lending is particularly organization level. !! ! ! ! ! ! !!! !! ! ! ! ! Chapter 2 - Structural Change Among Community and Noncommunity Banks In the past 25 years, the number of banks has declined Consolidation sharply. !! ! ! !! ! !! !! ! ! ! !! ! ! !! ! ! !! While community banks account for just 15 percent of the banking industrys total loans, they hold 30 percent of all CRE loans, 36 percent of small business loans and 70 percent of agricultural loans. ! ! !! !!! ! ! ! ! ! !! ! Last Updated: September 7, 2022. !! ! ! 10/3/2008, p. 2. http://www.gpo.gov/fdsys/pkg/BILLS-111hr5297enr/pdf/BILLS- 17 Treasury, Capital Purchase Program, Program Purpose and Over- 111hr5297enr.pdf. ! ! !! The https:// ensures that you are connecting to ! ! ! ! ! !! ! ! !!!! Browse our !!! ! ! !! ! ! ! ! !! !! !! ! ! !!!! ! !! !!! Note: The remaining banks in each group are categorized as "No Specialty." !!!!!! !!! ! ! !!! Browse our extensive research tools and reports. Source: FDIC. ! ! ! FDIC Community Banking Study December 2012 511, 64 ! !!! ! ! Table 3.7 lists and nonmetro areas point to greater opportunities for 21 large U.S. metropolitan areas, encompassing around 21 growth on the part of banks that do business in metro percent of 2011 U.S. population, that experienced the fast- areas. !! ! ! ! Among Community Banks? ! ! ! ! !! Diversification of Geographic Risk in Retail Bank Networks: Evidence from Bank Expansion after the Riegle-Neal Act. Note: Figures represent weighted average pretax return on assets for federally insured community banks reporting in each group during the period. ! !! ! ! ! ! ! ! ! !!! ! ! ! ! Help, FDIC Community Banking Study !! ! ! !! ! !! ! ! !! ! ! ! ! Because of their focus on loan portfolios at noncommunity banks in the years ahead traditional lending and deposit gathering, community depends in no small part on the extent to which the pre- banks derive 80 percent of their revenue from net interest crisis pattern of growth reasserts itself in coming years. !!!!!! ! ! ! ! Community banks are almost three times more likely the less consolidation will take place as a result of failures. ! !! !! Table 1.3 compares the number of organizations, total assets, and the number of offices for each of these noncommunity bank size groups against the corresponding totals for community banks and for the industry as of year-end 2010. ! ! ! !!!!! ! ! ! Payments to TruPS investors were tax TruPS difficult to issue in highly risk-averse capital deductible for the holding companies that issued them, markets. ! ! ! ! !! FDIC Community Banking Study December 2012 44, 45 ! ! ! In comparison, community banks report 37 percent of the total number of industry offices, and 15 percent of industry assets. ! !! !!! ! ! ! ! ! !!! ! ! ! ! ! !! !!! (For a fuller discussion of (2007-2009 for noncommunity banks, 2008-2010 for bank ownership structures, see the inset box Bank community banks) with large volumes of capital raised Ownership Structure and Access to External Capital.) ! , !! !! ! ! ! in the northeastern United States, where mutual savings banks have a long history. ! ! !! ! !! !! !!! ! ! ! ! in 2011 made up 16 percent of the fast-growing market banks, but they held $2.8 trillion in assets, or 93 percent of the assets of all banks headquartered in these fast-growing The migration of noncommunity banks toward areas of markets. !!! ! !! ! ! ! ! !! ! !!!!!! !! Before laws allowed for tions in 2010 (see Chart A.1). !! ! !!! !! !!! ! Table 5.14 shows that more than Securities (TruPS) outstanding at the holding company level (50 percent).8 While not every community bank 7 Some institutions with C&D loans greater than 10 percent of assets followed this profile, these characteristics tended to distin- may remain in the No Specialty group if their total loans-to-assets ratio guish banks that shifted lending strategies from those that remains below 33 percent. !!! ! Consolidation in the U.S. banking industry is a multi- Importantly, the new definition captures 330 larger bank- decade trend that reduced the number of federally insured ing organizations that might have been excluded if asset banks from 17,901 in 1984 to 7,357 in 2011. ! !! major exchange or in over-the-counter trading. !! The share of capital raises for troubled community a historic high of 17.5 percent, one-fifth of the community banks and noncommunity banks was very low during the banks that did so were participants in the TARP or SBLF non-crisis years between the mid-1990s and the mid-2000s. C corpora- S Corp 14,000 C Corp tions are subject to taxation of earnings at the corporate level in addition to taxation of any dividends distributed 12,000 to shareholders. !!! ! ! ! ! !! ! ! ! ! ! By 2011, noncommunity banks on average ing the crisis, the largest noncommunity banks were able generated a dollar in net operating revenue for every 60 to generate significant amounts of noninterest income cents in noninterest expenses incurred, while community through a variety of sources, including securitization and banks generated a dollar of revenue for every 70 cents in other capital markets activities, mortgage origination and noninterest expenses. A bankers bank is a financial 9 In 2010, after excluding specialty banks and banks that did not meet institution that provides financial services to other banks. ! !!! !!!!! !! ! The FDIC's 2012 Community Banking Study is a data-driven effort to identify and explore issues and questions ! !!!!! Community banks are defined, in quarters locations of U.S. community and noncommunity part, by the fact that they operate within limited banks, respectively, as of 2011. !! ! expenditures on the part of noncommunity banks in the Community banks in the mortgage, agricultural and no years ahead. !! ! The FDIC is proud to be a pre-eminent source of U.S. ! !!! ! ; ! ! ! ! ! !!! ! !!!! ! There noncommunity banks declined (improved) through much is reason to question whether some elements of this reve- of the study period because of lower noninterest expenses, nue model will regain their former importance in the wake those gains largely dissipated after the onset of the crisis of the financial crisis. !! !! !! ! ! ! !! Community banks acquired more than two-thirds of the community banks that closed during the study period. !! ! ! ! ! ! ! ! ! ! ! ! ! Map 3.2 Noncommunity Bank Headquarters and Branch Locations, Year-End 2011 Source: FDIC. ! !! !! !!! !!! ! ! ! ! !!! !! ! ! !! Noncommunity banks consoli- charters that exited the industry between 1984 and 2011. dated much faster over the period when measured in terms of charters, which declined by 72 percent, than when Structural Change Among Community measured in terms of banking organizations, which declined by 23 percent. !!! ! !! ! !! !! The FDIC's 2012 Community Banking Study is a data-driven effort to identify and explore issues and questions about community banks. This study is intended to be foundational, providing a platform for future research and analysis by the FDIC and other interested parties.. All items below are PDF files. !! The erosion in recent years of the advan- levels of noninterest income relative to community banks tage that community banks have typically enjoyed in is closely connected to their ability to earn noninterest generating net interest income from traditional lending income from a wider range of sources. Of the more positive retained earnings and dividends. !! The maps show that geographic areas. FDIC Community Banking Study December 2012 55, 58 ! ! ! ! ! ! ! ! Some smaller institutions may have business specialties The process of designating community banks for this that are far removed from deposit gathering and lending to purpose consists of five steps, described below. ! nity banks. ! ! + Noninterest Income Because community banks maintain more employees per dollar of assets, their payroll expenses are higher than The efficiency ratio is a simple expression of the underly- those of noncommunity banks when measured as a ing operational performance of banks apart from differ- percentage of assets. ! !! Lending. ! !!! ! !! ! that have increased their holdings of long-term assets in the current low-interest-rate environment. ! !! ! ! ! ! ! !!! !!!! ! !! ! ! !! ! ! !! ! ! ! ! !! !! !!! !! !! ! ! ! !!!!!! ! !! !! ! ! ! ! ! ! ! ! ! ! ! ! !! The GAO sampled 794 stand-alone banks and thrifts (those with no holding Most smaller institutions have not raised capital since January 1, company) and top-level bank holding companies and thrift holding 2008, and the majority of those reported no need for or interest in addi- companies with total assets of less than $10 billion out of a universe of tional capital (see fig. total changes attributable to each component since 1998, While the efficiency ratio for this group underwent only a yields the results in Charts 4.15 and 4.16. very small 0.4 percentage point decline between 1998 and 2011, this net change belies more substantialand largely Chart 4.15 depicts the components of cumulative change offsettingchanges to the components of the ratio. assets as of year-end 2011. This aggrega- tion applies both to balance-sheet measures and the This is precisely the approach used by the FDIC to arrive number and location of banking offices. ! The crisis marked a sudden interrup- ROA over the study period was one basis point higher tion of a long-term cycle of rising home prices, rising mort- than that of continuously operating noncommunity banks. ! !!!!!!!!!! ! encrypted and transmitted securely. ! ! This is the sixth conference in this important series sponsored by the Fed, the Conference of State Bank Supervisors, and the Federal Deposit Insurance Corporation (FDIC). ! ! !! !!! ! ! !! !!! ! ! !! ! !! ! ! ! ! !!! ! !! !!! ! ! ! !! ! ! !! ! ! On the whole, however, the demographic forces that have contributed to rural depopulation and slow growth for rural community banks do not appear likely to reverse in the near term. ! ! ! In all, the total annual net income dends. ! !! !!!!! ! ! ! ! !! ! Chart 2.8 depicts the share of industry assets held by banks in the four largest banking organizations in every quarter from year- end 1984 to year-end 2011, along with the total assets of institutions they would eventually acquire directly or indirectly. ! For banks that have Contributions to Annual Changes in Equity Capital been acquired in transactions in which push-down accounting is All Noncommunity Banks applied, changes incident to business combinations generally represent As Percent of Equity Capital on Hand at Beginning of Year the net difference (positive or negative) between the acquired banks 20 Raised From External Sources capital at the end of the prior year and its equity capital as restated to Retained Earnings reflect the purchase price of the banks stock acquired in the transac- 15 tion and the fair value of any of the banks stock not acquired. ! !! Full ! !! !! ! ! ! ! ! !! Noncommunity banks have been able to dramatically increase their presence in fast-growing metro 3 Anderlik and Walser (2004) categorized declining counties as those that lost population over the 30-year study period and accelerated declining counties as those that not only lost population, but did so more rapidly toward the end of the period. Overall, footprint of community banks is in terms of the number of the number of community banking offices declined by 18 counties in which each community banking organization percent between 1987 and 2011, while the number of maintains banking offices. ! The share of community banks holding and 1990s, bank holding companies were often used to mutual charters has gradually declined over time, from 15 operate geographically dispersed banking franchises percent in 1984 to just under 7 percent in 2011. through multiple charters. ! ! The https:// ensures that you are connecting to The average ratio for all nent of ROA for the community bank lending specialty community banks also increased in each of the five-year groups. ! ! !!!! ! ! !! !!!! ! ! ! ! !! !! If the number of new community bank charters in Unfortunately, the data available through Call Reports the next decade were to approach the 997 de novo and other regulatory filings do not provide a breakdown of community banks established in the 2000s, the likely regulatory versus other types of noninterest expenses. !! ! ! ! ! Note: Merger-adjusted to reflect community bank designations as of year-end 2011. ! !! !! ! coming years are marked by a period of financial stability FDIC Community Banking Study December 2012 I, 6 ! ! ! !!! ! earnings also helps to explain this trend. ! ! ! !! !! ! !!!!! ! !!! ! ! ! !!! !! !!! ! !! ! ! !! !!!!!! ! !! !! ! 2022 Bankers DigestPublished by IBAT Marketing Inc.a SUBSIDIARY of the Independent Bankers Association of Texas, 2022 Bankers DigestPublished by IBAT Marketing Inc.,a SUBSIDIARY of the Independent Bankers Association of Texas, Mullings Tapped as El Paso Market President for City Bank, Liberty Capital Bank Taps Morris as CEO and Pickard as CFO, American Bank Kicks Off Annual Holiday Bear Drive, American Bankers 2022 Best Banks to Work For List Includes Texas-based Financial Institutions, The First Liberty National Bank Converts to a State-Chartered Bank, Click here to contact the editorial department, Click here to send us your banks news or to contact the editorial department. ally declined steadily for community banks during the While this strategy for adding to capital is used less years between banking crises, as risk-weighted assets rose frequently than earnings retention, the discussion shows faster than equity capital. ! They include both a minimum and left side of the diagram shows that the 92 organizations maximum number of total banking offices, a maximum with assets less than $1 billion, plus another 34 with assets level of deposits for any one office, and location-based greater than or equal to $1 billion, were excluded at the criteria. ! ! ! ! !! !!! ! * Includes trading, venture capital, and investment banking income. ! ! ! ! !! !! ! !! ! !!! ! ! !! ! Both states subsequently adopted inter- billion grew from 32 to 107 during the period, while their state branching. FDIC Community Banking Study December 2012 522, 75 ! ! !! ! ! ! ! ! ! !! !! ! ! ! ! ! ! ! Since 1984, noncommunity banks headquartered Community Banks Predominate in Nonmetro in these fast-growing markets had directly acquired 375 Areas Where Growth Is Slow or Negative institutions with $1.5 trillion in assets and had indirectly In contrast to noncommunity banks dominance in metro acquired another 1,558 charters. ! ! ! ! ! ! ! ! ! ! The FDIC insures deposits; examines and ! ! ! !!! ! ! ! ! testimony on the latest banking issues, learn about policy ! ! ! !! ! !!! ! ! ! !!!! !!!!! ! 1.2 15% Other Nonfarm Nonres. ! !! ! !!! ! !! ! ! ! maintained a satisfactory succession plan, a majority also had an ownership structure that was closely tied to current senior management. !!!! !! Of community banks operating in 2011, 42 percent mance that appears to define the opportunity set facing had never raised external capital after their first year of many community banks. ! !! ! !! !! !! !!!! ! ! !!! ! ! !! ! ! See 26 U.S.C. earnings. ! branching, which made possible the interstate consolida- tion of charters within banking companies.5 While consol- idation occurred throughout the 27-year period, mergers The Net Effect of Structural Change and consolidations peaked, both in number and as a percent of existing charters, in the latter half of the 1990s, Chart 2.5 and Chart 2.6 depict the net effects of structural soon after these restrictions were relaxed. !!!! ! !! ! ! ! ! ! !! !! ! !! Table 5.12 Community Bank Failure Index by Lending Specialty Group, 1985-2011 Time Period Five-Year Intervals All Years: Lending Specialty Group 1986-1990 1991-1995 1996-2000 2001-2005 2006-2010 2011 1985-2011 CRE Specialists 3.34 4.62 0.00 0.72 2.30 3.42 2.25 C&I Specialists 1.87 1.58 3.02 6.27 0.53 0.51 2.19 Consumer Specialists 0.96 1.03 0.00 0.00 0.00 0.00 1.20 Mortgage Specialists 1.11 1.57 0.45 1.24 0.45 0.00 1.03 Agricultural Specialists 0.76 0.07 1.31 0.00 0.16 0.08 0.53 Multi-Specialists 2.02 2.34 2.54 2.24 1.27 0.42 1.71 No Specialty 0.42 0.39 0.80 0.19 0.19 0.09 0.41 Total 1.00 1.00 1.00 1.00 1.00 1.00 1.00 Number of Failures 1,328 441 20 17 270 88 2,284 Source: FDIC. ! First issued in the early 1990s, TruPS are debt-like deferred dividend payments.14 The deteriorating perfor- instruments issued by bank holding companies to raise mance of many community bank TruPS and declining funds that may then be downstreamed to bank subsidiaries investor confidence in CDOs made community bank as equity capital. ! ! !! !! ! ! !! ! ! ! !! !! !! !!! ! ! Table 6.2 Federally Insured Banks and Thrifts Reporting Positive Net Income, Dividends and Retained Earnings by Ownership Type, 1985-2011 Community Banks Percent of Year-End Financial Reports With: Dividend and Dividend > 0 Ownership Net Income Retained Earnings Dividend Retained Earnings and Dividend > Type >0 >0 >0 >0 Net Income Stock 88% 80% 72% 62% 10% Mutual 88% 88% 0% 0% 0% Total 88% 81% 65% 56% 9% Noncommunity Banks Percent of Year-End Financial Reports With: Dividend and Dividend > 0 Ownership Net Income Retained Earnings Dividend Retained Earnings and Dividend > Type >0 >0 >0 >0 Net Income Stock 87% 73% 67% 50% 17% Mutual 81% 80% 3% 2% 1% Total 87% 73% 66% 50% 17% Source: FDIC. ! ! !!! ! ! ! ! !! !!! !! ! ! ! !! !! ! ! !!! ! ! !! ! ! ! ! !!!! ! ! !!! !!!! ! ! A number of these thresholds are community bank. ! ! ! ! !! ! ! !!! ! ! !! ! ! ! ! FDIC Community Banking Study December 2012 610, 87 ! !! ! ! !! ! ! !!! ! ing companies under $500 million may continue to count TruPS toward 13 Source: SNL Financial. ! ! !! ! ! !!!! ! !! Mortgage specialists made up 16 percent of met that definition in 2011. !!! !!! ! ! !! ! ! ! ! policy when you follow the link. ! !! ! ! !! !! !! ! !! !!!! ! 2020 Community Banking Study - FDIC: Federal Deposit Insurance Corporation !! ! ! ; ! ! ! !!! !!!! ! !! ! read, FDIC Acting Chairman Martin Gruenberg To Address 2022 Conference, 2022 Community Banking Research Conference Volume, The Benefits and Costs of Transparent Supervision of Public Banks: Evidence from Disclosure of SEC Comment Letters. Mortgage specialists and agricultural While many community banks hold relatively diversified specialists each made up a substantial share of community loan portfolios, a small majority can be considered as having a lending specialty in one of five broad groups. ! !! ! !! ! However, whether measured in ists or had no specialty. !! !!!!! ! ! * Includes 21 FDIC-insured institutions owned by the nations four largest banking organizations by asset size: Bank of America Corporation; Citigroup Inc.; JP Morgan Chase & Company; and Wells Fargo & Company. Banks regulatory compliance function is likely a factor contributing to scale economies, thereby indirectly affecting some banks decisions to enter or exit the industry and the distribution of residential mortgage holdings across banks of different sizes. As described in Step 4, this statistical area (MSA) contains a core urban area of 50,000 or more in requirement is intended to ensure that large institutions primarily population. raises carried out by community banks during the study period were undertaken by troubled institutions, or those that had been rated 3, 4 or 5 within the past two years. ! ! ! ! ! ! ! In addition, at least one-half interviewed with the same set of questions. ! ! ! ! ! ! ! ! ! ! ! According to any of these measures, $1 billion is not Community banks can develop these close relationships what it used to be. ! !!! !!! !!! !! ! ! ! !!! !! !! !!! ! exceeded net income, the amount of negative retained percent of net income clearly fell during crisis episodes. Table 5.8 Noninterest Income to Average Assets by Lending Specialty Group, 1985-2011 Time Period Five-Year Intervals All Years: Lending Specialty Group 1986-1990 1991-1995 1996-2000 2001-2005 2006-2010 2011 1985-2011 Consumer Specialists 1.07% 1.31% 1.29% 1.20% 1.10% 2.69% 1.20% C&I Specialists 0.95% 1.19% 1.09% 1.14% 0.94% 0.72% 1.04% CRE Specialists 0.79% 0.92% 0.90% 0.92% 0.72% 0.65% 0.80% Agricultural Specialists 0.61% 0.65% 0.71% 0.66% 0.65% 0.59% 0.65% Mortgage Specialists 0.63% 0.57% 0.62% 0.67% 0.66% 0.80% 0.64% No Specialty 0.81% 0.91% 0.92% 1.05% 1.16% 1.02% 0.95% Multi-Specialists 0.89% 0.88% 0.97% 1.02% 0.88% 0.88% 0.93% Total 0.77% 0.81% 0.84% 0.91% 0.82% 0.82% 0.83% Source: FDIC. !!!!!! !!!! !! !!!! ! ! !! !! !!!!! ! ! ! ! ! !! ! ! !! ! ! ! ! !! ! ! Public issuance of TruPS by community bank hold- community and noncommunity banks between 2008 and ing companies peaked in 2003 at $2.1 billion, but remained over $1 billion annually through 2007 before declining sharply.13 14 Fitch Bank TruPS CDO Default and Deferral Index, Structured Credit Special Report, FitchRatings, November 2010. ! !!! ! !! ! !! ! With a multiplier compression of net interest margins. ! ! ! !! This occurred as noncom- Chart 5.1 munity banks were shifting their portfolios in the opposite Retail Loans as a Percent of Total Loans and Leases, 1984-2011 direction, from a commercial to a retail lending focus, and generally reducing the share of loans on their balance Percent of Total Loans and Leases 70% sheets. !! !! ! ! ! ! Just headquartered in metro counties retained a higher percent- over 10 percent of the year-end financial reports filed by age of net income than community banks headquartered all banks during the study period showed material in nonmetro counties. ! ! !!! ! ! !! ! ! ! Income and Expense Components of Pretax Consumer specialists earned more noninterest income ROA than any other specialist group for the period as a whole and in every five-year interval. ! !! ! !!!!! ! ! ! !! !! The issued them in much higher volumes, TruPS also became financial losses associated with the crisis led both commu- an important vehicle for raising capital at community nity and noncommunity banks to seek external capital banks. !! ! ! ! !! !! ! ! ! ! ! ! ! ! ! nity banks and $3.4 billion at community banks. !! ! !!! This growth, however, Community Banks did not occur in a straight line. However, the interview partici- pants felt that they would benefit from additional outreach and technical assistance from the regulatory agencies to assist them in their efforts to reduce their growing reliance on consultants and dependence on third-party service providers. ! !!! ! ! ! ! !! ! ! !! !! While one-third of noncom- tions represent a much higher proportion of capital raisers. ! ! !! !!! ! !! !! To the extent that these trends reduce the vitality of the area over time, the dynamics of out-migration and depopulation can become self-reinforcing. !! !!! !! ! ! !!!! ! ! !! !! !! ! !!! ! ! !!! ! For purposes of determining how many shareholders a companies. 1 High growth states defined according to the total increase in the Economy.com / Case-Shiller Home Price Index, 2000-2005. Other transactions with parent holding company institutions, which typically retain 100 percent of net In addition to capital from investors, other transactions with parent holding company (line item 11) may include funds received from selling income, are more prevalent among mortgage specialists affiliate banks, selling branches, selling real estate to the holding than among community banks in general. ! !! ! ! !! ! Chart 4.11 Chart 4.12 Salaries and Employee Benefits Expense to Average Assets, 1985-2011 Premises and Fixed Asset Expense to Average Assets, 1985-2011 1.8% 0.6% 1.6% 0.5% 1.4% 1.2% 0.4% 1.0% 0.3% 0.8% Community Banks Community Banks Noncommunity Banks 0.6% 0.2% Noncommunity Banks 0.4% 0.1% 0.2% 0.0% 0.0% 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: FDIC. ! multi-specialist groups, those with C&D loans greater than 10 percent were far more likely to fail than other members of these groups. ! !! !! !! ! ! ! ! ! FDIC Community Banking Study December 2012 B2, 101 Most of the interview participants indicated implementing new or changing rules and regulations. !! !! !! ! !! ! !! As of year-end 2010, there were 390 organiza- tions that did not meet the definition of a community bank and were designated as noncommunity banks. !! ! !! ! ! !! ! ! ! ! !!! Examples of items that might be at community banks in all but one year. !!! percent consolidated and 8 percent failed. !! ! !! ! The total risk-based capital ratio rose sharply for both groups in the wake of the recent financial crisis as the industry raised Long-Term Trends in Bank Capital Ratios capital and shed higher-risk assets. ! ! ! ! ! ! ! !! ! !! !! ! !!! ! ! ! ! !!! For the most part, the literature that uses bank data from the 1980s finds that banks achieve a minimum level of aver- age costs somewhere between $75 million and $300 million in total assets.1 Numerous studies from this period also find evidence of diseconomies of scale (increasing average costs) for the largest institutions. !! ! !!! ! ! ! Funds can then The vast majority of community banks hold stock char- be downstreamed to subsidiary banks. ! 0% Under PCA, a bank is categorized as well-capitalized if it has a total 1985 1990 1995 2000 2005 2010 risk-based capital ratio of 10 percent or greater; has a Tier 1 risk-based Source: FDIC. ! These four banking organizations have greatly expanded their branch networks and share of total banking offices in the largest U.S. cities. ! !! ! ! ! ! ! ! ! !! ! ! !!! December 1984 and ending in December 2011. ! !! ! ! Table 4.2 illustrates activities also contributes to the gap in earnings. !! ! ! ! http://www. ! !!! !! !! ! !! !! ! !! stability and public confidence in the nations financial ! ! ! Note: The failure index for each group is calculated as failures within that group as a ratio to all failures, divided by institutions in that group as a ratio to all institutions in that period. !! ! !! Between 1984 and 2011, residential on traditional lending and deposit gathering activities. First, community banks study period even as their loan mix shifted in the opposite rely much more on time deposits for funding compared direction, from retail to commercial loans. ! !! !!!! ! ! ! !! ! ! ! sion expenses were relatively high for C&I specialists and that those banks failed twice as often as their share of consumer specialists in every five-year interval, provision community banks. !! These results show that while some small community banks may be able to reduce their average costs through growth, there is no indication of any significant benefit beyond $500 million in asset size. !! ! ! !!! ! !!! !!! !! ! !! !!!! ! ! !!!!!! ! ! ! ! ! ! ! !! ! ! !!! ! ! !! !!! Nonetheless, given that the vast majority of institutions at any given time are community banks, switching even a small percentage of them to noncommu- Table 2.4 is a transition matrix that highlights the various nity banks will result in a large increase in that category. ! !!!!! !! In all, community banks 2 These designations are based on definitions for county equivalents made by the U.S. Office of Management and Budget (OMB) using were almost three times more likely than noncommunity Census Decennial population data. ! ! ! ! ! FDIC Community Banking Study December 2012 12, 15 !!! Quarterly Report to Congress, April 25, 2012, Page 37. Respondents regulatory compliance costs, several bankers did identify were not segregated according to community banker status, but were broken down by asset size, with 62 percent having more than $500 specific regulations that require significant attention million in assets and 38 percent with less than $500 million. FDIC Community Banking Study December 2012 II, 7 !!!!!!!! ! !!!! ! ! ! ! ! !!!! !! ! ! !!! !! ! ! ! ! ! ! ! ! ! ! ! !! !! ! !! !!! ! !! !! !! !!! ! !! ! !! FDIC Community Banking Study December 2012 41, 42 ! ! ! !! ! !! ! ! ! ! ! ! ! !! nity banks by the lending specialty groups introduced in These data are reported in the Call Report on Schedule RI-A, Changes Chapter 5. ! ! ! !!! ! ! !! Chart 6.16 Chart 6.17 During Periods of Distress, Half or More of Community Bank Capital Capital Raises by Troubled Noncommunity Banks Also Increase in Raises Are Undertaken by Institutions That Have Been Rated 3, 4 or 5 Crisis Periods, but to a Lesser Extent Than at Community Banks Community Banks That Have Been Rated 3, 4 or 5 Within the Past Eight Quarters, Noncommunity Banks That Have Been Rated 3, 4 or 5 Within the Past Eight Quarters, as a Percent of All Community Banks Raising Capital as a Percent of All Noncommunity Banks Raising Capital 100 100 90 90 By Lifetime Frequency of Capital Raising: 80 Occasional 80 By Lifetime Frequency of Capital Raising: 70 Frequent 70 Frequent 60 60 Occasional 50 50 40 40 30 30 20 20 10 10 0 0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: FDIC. ! ! !!! !! !! ! ! !! !!! ! ! ! As of 2011, about 57 percent of community banks Despite the relatively strong long-term operating results were categorized as mortgage specialists, consumer special- obtained by community banks in the baseline mortgage, ists, commercial real estate (CRE) specialists, commercial agricultural and no specialty groups, hundreds of commu- and industrial (C&I) specialists, and agricultural special- nity banks shifted out of these groups and into other lend- ists, while the rest were categorized into a group with ing specialties between 2000 and 2005, mostly by multiple lending specialties or a group with no lending accumulating larger balances of C&D and other CRE specialty. ! !! !! ! ! ! ! ! ! ! !! ! !!!! ! ! ! ! ! ! !! ! ! ! ! ! ! !! !! Stiroh (1999) finds that consolidation over the second half of the 1990s, a period characterized by mergers among larger institutions, was asso- ciated with reduced profitability as the largest bank mergers underperformed. ! ! !! ! Older community banks generally performed banks is their ability to generate much higher volumes of more favorably compared with noncommunity banks, but noninterest income. ! ! ! !! history, career opportunities, and more. ! ! ! !! ! These direct acquisition targets included many large institutions, with 24 reporting assets greater than $10 billion when they were acquired. ! ! ! !!! !! ! ! ! !! !! !! The Importance of Retained Earnings for Community There are important differences in earnings retention Banks. ! ! !! ! ! !! !! !!!! ! !! bank holding company, all banks under the holding company are combined into one organization. ! ! !!!!! !! !! reported a pretax ROA that averaged 35 basis points higher than for community banks. ! !!!!! ! ! ! !!! ! !! ! !! !! ! !! ! ! ! !! !! !! ! One question the study tried to address was how regulatory also be vulnerable to problems during economic down- costs have changed for community banks over time. ! ! ! ! !! ! ! ! !!!!!! !! ! Charter consolidations averaged 234 groups and for community and noncommunity banks. ! ! ! !!!!! ! ! Assets held by other charters with assets over $10 billion also grew during this period, but their share of industry assets did not grow nearly as dramatically as the share held by the four largest banking organizations. ! !!! ! ! Asset quality at community banks located in depopulating rural areas was not as strong as metro-based community banks from 2001 through 2007, but those institutions again fared better from 2008 through 2011. !! ! !! ! ! ! !! ! ! attest to the accuracy of a non-federal website. ! !! These results also tal frequently from external sources during the study suggest a trade-off between growth and financial perfor- period. !! !! !! ! Nonetheless, there are reasons to suspect that economies of scale could indeed arise in some segments of the banking industry. ! The study shows that effort to identify and explore issues and questions about community banks hold the majority of banking deposits in community banks. ! ! !! ! ! !!! ! ! !! ! ! !! ! ! !! ! !! !! ! For banking organizations with total assets between $500 million and $15 billion as 11 Federal Reserve press release, October 21, 1996, http://www.federal- of December 31, 2009, TruPS issued before May 19, 2010, may still be reserve.gov/boarddocs/press/bcreg/1996/19961021/default.htm. ! ! !! !!!! !! the Fastest-Growing Metro Areas Metro counties have experienced significantly faster rates of growth in population and economic output compared with nonmetro counties over the past 27 years (Table 3.6). ! profiles, working papers, and state banking performance !! restrictions had the effect of artificially inflating the number of banking charters, and their removal was bound These disparities in population and growth have not to result in consolidation. !! val for which the comparison was made. In cases where a ters (Chart 6.6). The definition of an office as reported in the Call Reports and TFRs is slightly more expansive than Number of Banking Offices. ! !! !! !! !! ! !! ! !!! ! ! ! !! ! ! ! ! government site. !!! ! ! many do so through private placements that are subscribed banks have been able to raise external capital when it has by the current owners and directors of the bank or other been necessary to do so.8 local investors who have unique knowledge of and interest in the institution. ! Table 2.3 Community and Noncommunity Banking Organizations, Charters and Assets, as Percent of Total, 1984-2011 Banking Organizations Bank and Thrift Charters Total Assets Year Community Noncommunity Community Noncommunity Community Noncommunity 1984 97% 3% 87% 13% 38% 62% 1985 97% 3% 87% 13% 37% 63% 1986 96% 4% 86% 14% 35% 65% 1987 96% 4% 86% 14% 33% 67% 1988 96% 4% 86% 14% 32% 68% 1989 96% 4% 87% 13% 31% 69% 1990 96% 4% 87% 13% 30% 70% 1991 96% 4% 87% 13% 30% 70% 1992 96% 4% 87% 13% 30% 70% 1993 96% 4% 87% 13% 28% 72% 1994 96% 4% 87% 13% 26% 74% 1995 96% 4% 87% 13% 24% 76% 1996 96% 4% 88% 12% 23% 77% 1997 95% 5% 89% 11% 22% 78% 1998 95% 5% 88% 12% 20% 80% 1999 95% 5% 88% 12% 20% 80% 2000 95% 5% 89% 11% 19% 81% 2001 95% 5% 90% 10% 19% 81% 2002 94% 6% 90% 10% 18% 82% 2003 94% 6% 90% 10% 18% 82% 2004 94% 6% 90% 10% 16% 84% 2005 94% 6% 90% 10% 16% 84% 2006 94% 6% 89% 11% 15% 85% 2007 94% 6% 89% 11% 14% 86% 2008 94% 6% 90% 10% 14% 86% 2009 94% 6% 91% 9% 15% 85% 2010 94% 6% 92% 8% 15% 85% 2011 95% 5% 92% 8% 14% 86% Source: FDIC. ! ! changes for banks, and get the details on upcoming !! ! !! ! ! ! !! !! Between 1984 and 2011, the four largest banking organizations directly acquired 353 insured institutions with total assets of $2.5 trillion. ! In periods where earnings have faltered, tal base, funding mix, lending specializations, and staffing retained earnings have declined sharply or become nega- in addition to local economic conditions. ! ! ! ! ! ! ! ! Consumer As Map 5.1 shows, CRE specialists were primarily head- specialists comprised 1 percent of both the number and quartered in metro counties (80 percent) and tended to be total assets of community banks. ! ! ! ! ! !!!! !!! Table 4.1 Weighted Average Pretax ROA by Structural Subgroups Aggregate 1986-1990 1991-1995 1996-2000 2001-2005 2006-2010 1985-2011 All Banks 0.50% 1.38% 1.79% 1.90% 0.77% 1.26% Community Banks 0.47% 1.31% 1.56% 1.49% 0.60% 1.05% Noncommunity Banks 0.51% 1.41% 1.85% 1.99% 0.80% 1.31% Aggregate 1986-1990 1991-1995 1996-2000 2001-2005 2006-2010 1985-2011 Headquartered in a Metropolitan Area Community Banks 0.38% 1.20% 1.53% 1.49% 0.45% 0.94% Noncommunity Banks 0.50% 1.40% 1.83% 1.98% 0.79% 1.30% Not Headquartered in a Metropolitan Area Community Banks 0.78% 1.60% 1.63% 1.50% 0.95% 1.25% Noncommunity Banks 1.10% 1.87% 2.91% 2.39% 1.34% 1.88% Aggregate 1986-1990 1991-1995 1996-2000 2001-2005 2006-2010 1985-2011 Continuously Operating 1985-2011 Community Banks 1.20% 1.60% 1.66% 1.56% 0.84% 1.27% Noncommunity Banks 0.78% 1.55% 1.79% 1.85% 0.84% 1.26% Not Continuously Operating 1985-2011 Community Banks 0.20% 1.13% 1.45% 1.38% 0.03% 0.76% Noncommunity Banks 0.44% 1.35% 1.90% 2.17% 0.68% 1.37% Aggregate 1986-1990 1991-1995 1996-2000 2001-2005 2006-2010 1985-2011 Less Than 5 Years Old Community Banks -1.12% 0.71% 0.04% 0.26% -0.74% -0.29% Noncommunity Banks 0.63% 1.56% 2.30% 1.68% 0.34% 1.16% 5-10 Years Old Community Banks -0.11% 1.00% 1.44% 1.32% 0.20% 0.64% Noncommunity Banks 1.55% 1.82% 2.43% 2.07% 0.59% 1.56% 10-25 Years Old Community Banks -0.05% 1.17% 1.66% 1.74% 0.47% 1.01% Noncommunity Banks 0.46% 2.11% 2.24% 2.74% 0.91% 1.80% 25-50 Years Old Community Banks 0.02% 1.30% 1.62% 1.64% 0.46% 0.93% Noncommunity Banks -0.14% 1.03% 1.76% 1.97% 1.03% 1.21% More Than 50 Years Old Community Banks 0.73% 1.38% 1.58% 1.50% 0.78% 1.14% Noncommunity Banks 0.53% 1.36% 1.76% 1.82% 0.79% 1.23% Source: FDIC. ! !! ! !!! !!!! !! ! ! The FDIC's 2020 Community Banking Study is a data-driven effort to identify and explore issues and questions ! While noncommunity banks have adeptly located in Deposit Market Shares Are Declining for metropolitan areas that have the greatest concentrations Community Institutions of population and economic activity, community banks are Consistent with their declining share of banking industry prevalent in both metro and nonmetro areas. !! ciency gap represent an anomaly that will not be repeated once banking activity returns to normal. !! !! !! ! ! Together, these level has declined more slowly. ! ! * Includes agricultural production loans and real estate loans secured by farmland. ! ! !! !! ! !!!!! !! ! system. ! ! Hughes, Joseph P. and Mester, Loretta J., Who Said Large Banks Dont Experience Scale Economies? Mutual holding companies are formed to permit shall be treated as one shareholder. ! ! ! ! ! !! ! ! ! ! ! ! ! ! ! ! !! ! ! ! ! 2001. ! ! ! !! ! ! !!! ! ! ! ! ! ! ! !!!!! try assets) in 1984 to $11.1 trillion (80 percent of industry into larger size groups; 24 percent of the new charters that assets) in 2011. Depopulation continues to have a pronounced effect on the age distribution in many rural counties. ! !! As large as they are, these 1990 74% 20% 30% 11% concentrations of banking activity in metro counties still 1991 73% 21% 32% 11% fall short of the metro share of U.S. population and 1992 72% 22% 33% 11% 1993 71% 22% 32% 13% economic output. ! ! !! ! !! ! !! !!! ! ! ! Institutions in these three groups failed far more frequently than the average community This discussion of expense ratios and efficiency naturally bank. ! ! ! ! ! !! ! !! ! ! ! ! ! ! ! ! !! The second development is the 4 Source: Strahan (2002). !! ! ! ! !!! ! ! ! ! Summary Community banks are known for their focus on traditional banking activities. ! ! WASHINGTON Droves of community banks in the last quarter century have succumbed to earnings volatility, consolidation and heightened regulation. ! ! ! ! Based on 2010 county designations made by the U.S. Office of Management and Budget. !!! ! I n mid-December, the Federal Deposit Insurance Corp. (FDIC) released the 2020 Community Banking ! ! !! ! ! !!! ! Analysis of other community bank specialty lending groups shows that, while the cost-minimizing scale varies between $75 million and $300 million depending on the lender specialty, there is no evidence of economies of scale for any specialty group beyond $500 million. ! !! ! !! ! !!! ! ! !! ! ! ! ! !! !! ! Agricul- in Alabama, Mississippi and Texas had no lending tural specialists (with a weighted average pretax ROA of specialty. 2 Banks are also considered to be multi-specialists if they hold total Table 5.3 shows the lending specialty groups used in this retail loans or total commercial loans greater than 40 percent of total study. !! ! !! !! !!! !! !! !! ! ! ! ! income compared with about two-thirds at noncommunity banks. ! rose somewhat in the non-crisis years from the mid-1990s the raise nor an acquirer or fast grower after the raise. ! ! ! ! ! ! !! ! ! Much of the benefit from economies of scale appears to dissipate once community banks reach $100 million in total assets. !! ! ! ! ! ! Working Paper 465, University of Toronto, Department of Economics. !! !!!! ! !! !! ! ! ! ! ! !!! ! ! ! !!!! ! !! Also, when short-term 4 The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), enacted on July 21, 2010, provides temporary unlimited interest rates fall to especially low levels, competitive pres- deposit insurance coverage for noninterest-bearing transaction sures may result in an effective floor for interest-bearing accounts from December 31, 2010, through December 31, 2012, regard- deposits, pricing them above other forms of short-term less of the balance in the account and the ownership capacity of the funds. 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