! ! !! !! ! ! !! !! !!! ! !!! ! ! ! ! ! !! !! ! Since these attri- butes are generallybut not alwaysassociated with smaller banking organizations, most previous studies have used asset size alone to define community banks. ! ! ! !!! ! ! gage and consumer debt, and expanding residential construction activity that not only fueled balance sheet One element of the performance gap has been a narrowing expansion at noncommunity banks, but also provided of the traditional advantage that community banks have much of the impetus for economic growth in metro areas had in generating net interest income in recent years as and for the U.S. as a whole. ! ! ! ! ! Of community banks that The ability of any bank to consistently meet the credit belonged to one of the three baseline specialty groups in needs of its borrowers over time depends on maintaining a 2000, those that switched to a C&D strategy grew more solid base of equity capital. ! ! !! ! ! ! !!! ! Raising of External Capital by New Charters. ! For a more complete discussion of TruPS meet the criteria for Strategy 1 or Strategy 2, including those that no as a source of external capital, see Raising Capital Through Trust longer qualified as community banks. ! ! ! ! ! ! ! ! ! ; ! ! ! ! ! ! ! have almost always been lower at community banks than at noncommunity banks (see Chart 4.10). !! ! ! For the entire study period, agricultural specialists provision expenses reported by agricultural specialists, reported an average efficiency ratio of just 62 percent, multi-specialists and the no specialty group all remained compared with the overall community bank average of 68 relatively close to the overall community bank average. !! ! Moreover, Map 3.2 shows particularly dense politan areas, as discussed further below. !! ! ! ! ! ! ! ! ! !! ! As a result, assets, Table 3.5 depicts a parallel long-term decline in the while most metro areas tend to be well-served by institu- community bank shares of banking offices and total depos- tions with a variety of business models, many nonmetro its. ! !!!!! ! ! ! ! !! !! ! ! !!!!!!!!!! In metropolitan statistical areas ranked in the top 25 percent by population, the top four banking organizations oper- ated 26 percent of all banking offices in 2011 compared with just 6 percent in 1994.2 For comparison, in all other U.S. metropoli- tan areas, the top four banking organizations held a 14 percent share of all branches in 2011 (Chart 2.9). ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !! ! ! ! ! !!! !! !! created by the Congress to maintain stability and public confidence in the ! !! !!! !! ! !! ! ! ! ! ! ! !! During this period, U.S. real estate prices rose three baseline groups through 2005 did experience rapidly, with S&P Case-Shiller 20-City Home Price Index increases in the level of troubled institutions after the rising by a total of 82 percent. ! ! ! ! !!! Some of the economic and demographic challenges faced by depop- ulating regions appear likely to continue in the future. ! ! !! ! ! !!! !!! ! ! ! ! ! !! !!!! ! ! ! Federal government websites often end in .gov or .mil. !! age number of unassisted mergers was 346 per year between 1985 and 2000 and declined to 182 per year from This chapter analyzes the decline in the number of banks 2001 through 2011, with the three slowest years for merger to determine the effects of consolidation, mergers, failures, activity occurring between 2009 and 2011. !! !!!!! ! ! !! !! ! Noncommunity banks have the performance of community and noncommunity banks reduced their expenses, so that the gap is now almost differ. ! Table 5.3 Lending Specialty Groups Defined for Analysis of FDIC-Insured Community Banks Lending Specialty Group Definition Mortgage Specialists Holds residential mortgage loans greater than 30 percent of total assets Consumer Specialists Holds credit card lines and other loans to individuals greater than 20 percent of total assets Commercial Real Estate (CRE) Holds construction and development (C&D) loans greater than 10 percent of assets OR total CRE loans (C&D, multifam- Specialists ily, and secured by other commercial properties) greater than 30 percent of total assets C&I Specialists Holds commercial and industrial (C&I) loans greater than 20 percent of total assets Agricultural Specialists Holds agricultural production loans plus loans secured by farm real estate greater than 20 percent of total assets Meets more than one of the single-specialty definitions above OR holds either retail loans or commercial loans greater Multi-Specialists than 40 percent of total assets No Specialty All other institutions Source: FDIC. !! Chart A.1 Excluded Banking Organizations by Reason for Exclusion, 1984-2011 100% More Than Two Reasons 90% Percent of Excluded Organizations 80% Two Reasons 70% Single Reason: 60% Specialty Bank (including credit card banks) 50% No Loans 40% 30% No Core Deposits 20% 10% Foreign Assets 0% 1984 1989 1994 1999 2004 2009 Source: FDIC. ! ! ! C&I specialists were also box Do Economies of Scale Work Against Small Commu- well above the overall community bank average during the nity Banks? ! ! ! ! ! !!! ! !! ! ! ! !!!! ! ! !! !! !! ! !! !! Notes: The 2010 U.S. Census Population compared with the 1980 U.S. Census Population and the 2010 U.S. Office of Management and Budget Metropolitan and Micropolitan Statistical Area county classifications. !! ! ! ! !!! ! ! !! Shareholders, who own a percentage of the holding has, a corporation shall not be treated as having more than 1 class of company, elect part of the board, and depositors elect the remainder. ! ! ! ! ! ! ! However, multi- Performance Comparisons Across Community specialists were not as common as other lending special- Bank Lending Specialty Groups ties. !! !! !! ! ! ! !!! ! ! ! ! ! ! Prior to the March 31, 2010, Call Report, they were reported annually on the June 30 Call Report. ! Chart 4.13 and 2011. !! ! ! ! !! !! ! ! ! ! ! ! ! !! !! ! ! ! !! ! !! In Chart 5.5 tracks the rise of community banks that met the fact, community banks held more CRE loans secured by CRE specialty designation criteria in each year based on owner-occupied properties than C&I loans ($164 billion) whether the designation was derived from C&D lending, in 2011. ! !!! !! ! Historically, core deposits have been defined for analytical and examination purposes as the sum of demand deposits, all NOW and automatic transfer service accounts, money market deposit accounts, other savings deposits, and time deposits under $100,000. !!!!!!! ! !! ! The number of total banking offices operated by the top four banking organizations more than tripled to 18,743 between 1994 and 2011. ! ! !! Banks that limit their use of the model also controls for changes in macroeconomic noncore funding and maintain lower overall funding conditions over time, as well as differences between indi- costs also generate relatively higher returns. ! ! ! !! ! ! !! !! ! ! !!! ! !!! !! ! !! ! ! 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. ! ! ! ! !!! ! ! ! ! ! ! ! ! ! ! !!! ! !! ! ! !! !! ! Hundreds of community banks likely to fail than other institutions. ! ! ! !! !!! in the period 1991-1995. !! !!! excessively on the internet or other automated means to obtain funding. ! !! ! !! ! ! ! !!! ! ! !! ! ! !! noncommunity banks. ! ! ! ! ! !! who wish to replicate the analysis included in the original FDIC study. state nonmember banks that had been informed that their responses would remain anonymous to promote candidness. !! !! ! !!!!!!!!!! !! ! !!! ! ! !! ! According to any of these measures, $1 billion is not Community banks can develop these close relationships what it used to be. !! !!! ! !! Note: Excludes institutions in their first year of existence. ! ! Lending. ! ! ! We have noticed that you have an ad blocker enabled which restricts ads served on the site. ! ! ! Charts A.2 and A.3 depict the share of all begins with the essential functions of lending and deposit banking organizations that fall short of these thresholds in gathering, minimum levels for the ratio of loans-to-assets any given year. than 332,000 year-end financial reports submitted by feder- ally insured banks and thrifts since 1985, more than 291,000, or 88 percent, showed positive earnings for the Banks face a balancing act between adding to their capital year, with the remainder reporting zero or negative net base through retained earnings and paying regular divi- income (see Table 6.2). at community banks was attributable to higher noninterest In the aftermath of the crisis, large noncommunity banks expenses, all of which came about after 2008. !! ! !! !! !!! ! ! ! ! ! ! ! ! ! As the primary federal regulator for most community banks, the FDIC encourages further research into factors that may have influenced, or may have been influenced by, a community banks technology adoption decisions. The FDIC also encourages further research in the use of technology in community banks in general. ! ! ! !! 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. !!! ! ! !!!! ! ! ! ! !! ! Chart 5.14 Chart 5.15 Estimated Average Total Costs as a Function of Asset Size Estimated Average Total Costs as a Function of Asset Size FDIC-Insured Community Banks (CRE Lending Specialists), 2006 FDIC-Insured Community Banks (CRE Lending Specialists), 2009 Estimated Average Costs Estimated Average Costs 10% 10% 9% 9% 8% 8% 7% 7% 6% 6% 5% 5% 4% 4% 3% 3% $10,000,000 $100,000,000 $1,000,000,000 $10,000,000,000 $10,000,000 $100,000,000 $1,000,000,000 $10,000,000,000 Total Assets Total Assets Source: FDIC. ! ! !! ! ! ! ! ! !!! ! ! !! !! ! ! !!!! !!! !!!! Total noncommunity banks were separated into the following size groups for further analysis: noncommunity banks under $1 billion, between $1 billion and $10 billion, between $10 billion and $100 billion, over $100 billion, and those institutions that are part of the four largest banking organizations (Bank of America Corporation; Citigroup Inc.; JP Morgan Chase & Company; and Wells Fargo & Company. ! ! ! This study is intended to be history, career opportunities, and more. !!! ! ! ! ! ! ! ! ! ! ! !!!! !! !! ! In all, 34 percent of capital raises by of retained earnings and outside capital to add to their noncommunity banks preceded a period of rapid growth or capital stock over time. !!!! !! ! !! ! As retail lending became much more concentrated at the largest banking organizations, community banks not only held a smaller share of total industry assets, but also loan portfolios that were more heavily concentrated in the various types of commercial loans.1 Acquisitions by these large banking organizations significantly expanded not just their balance sheets, but also their branch networks. as reported in Call Reports and TFRs filed by banks are used to verify the minimum and maximum office criteria. ! ! The original files are included here for researchers ! ! Mortgage specialists, agricultural specialists, multi- no specialty (0.41) and agricultural specialists (0.53). ! !! ! ! ! !! !! ! !! ! ! ! ! 2 See for example, Grant Thornton, Bank Executive Survey: Bankers Optimism Rebounds Amid Concerns Over Dodd-Frank, Third Quarter While the interview participants generally felt that the 2011. ! ! ! ! ! ! whether they were frequent or occasional raisers. ! ! ! ! ! ! !!! !! ! !!!!!!! ! ! ! ! !! ! ! ! Source: FDIC. ! !!! !! ! !! in Strategy 1 or 2 in 2000, but also that the degree of concentration is an important determinant of the inci- dence of failure in each group. Depopulation continues to have a pronounced effect on the age distribution in many rural counties. !! ! ! ! !! ! ! !!! !!!!! ! ! !! ! ! CRE loans. ! ! ! The median value of a distribution is the value that is halfway between the smallest and the largest value when the data are ranked by magnitude. ! ! ! ! ! ! ! !!! ! !! ! ! ! ! !!!! ! !! ! ! This was particularly the case in the 2006- Given the relatively strong long-term operating results of 2010 interval and in 2011, when banks with a 10 percent these three groups, additional analysis was performed using concentration in C&D loans were several times more them as a baseline group. ! ! ! !! ! inter- or intrastate branching, individual banks in a hold- ing company often functioned as substitutes for branches. ! !!! bank holding company, all banks under the holding company are combined into one organization. !! Chart 2.10 Long-Term Consolidation of Charters and Assets at Community and Noncommunity Banks Number of U.S. Banking Organizations 16,000 14,000 Community Banks 12,000 Noncommunity Banks 10,000 8,000 6,000 4,000 2,000 0 1984 1989 1994 1999 2004 2009 Number of Charters 20,000 18,000 16,000 Noncommunity Banks 14,000 Community Banks 12,000 10,000 8,000 6,000 4,000 2,000 0 1984 1989 1994 1999 2004 2009 Total Assets, Dollars in Billions 16,000 14,000 Noncommunity Banks 12,000 Community Banks 10,000 8,000 6,000 4,000 2,000 0 1984 1989 1994 1999 2004 2009 Source: FDIC. !!!!!!!!!!! ! ! !! ! percent to 69.9 percent over this period, the efficiency ratio Comparing the efficiency ratio of community and of noncommunity banks improved slightly, from 60.6 noncommunity banks over time (see Chart 4.13) shows percent to 60.2 percent. related to traditional lending and deposit gathering activi- ties and limited geographic scope. ! ! ! !!! !! income compared with about two-thirds at noncommunity banks. Larger banks may be better able to diversify risks, especially when they can operate across many geographic regions that differ in their degree of correlation with the national economic business cycle. ! so. !! !! ! ! ! ! !!! ! ! In loan-loss rates, noncommunity banks have been able to two retail loan categoriesresidential real estate loans and consistently generate higher returns on assets. tively small 1.3 percent efficiency gap that existed as of leading up to the financial crisis, these factors turned into 1998. small net negatives in the years after the financial crisis. ! ! No Specialty 0.3 Pursued Alternative Strategies Strategy 1: C&D 4.7 Strategy 2: CRE 1.9 Failure Index, 2006-2011 Strategy 3: Other 1.1 0 1 2 3 4 5 Source: FDIC. ! !! One of groups in terms of adverse financial performance. ! !!! !! ! federal-deposit-insurance-corporation---fdic !!!! ! ! ! ! ratio, which measures common equity, certain types of preferred equity and retained earnings as a percentage of total assets. ! !!! ! ! !! Moreover, since the median and average bank size changes over time with inflation, economic Deposits in a Single Office. ! ! ! !! 6 Ibid, Table 10: p. 67. ! encrypted and transmitted securely. ! ! !! ! !! ! ! ! ! holding companies were too small to issue their own Overall, 2,712 existing community banks raised external TruPS in public markets, by the early 2000s investment capital at least once between 2008 and 2010, adding $27.4 banks were increasingly securitizing small TruPS into billion to their equity capital. ! ! ! !! Therefore, the role of owner-occupied CRE lend- has averaged 57 percent of the total liabilities of nonfarm, ing must be taken into account when interpreting the noncorporate businesses since 1970, and 73 percent of overall increase in CRE lending by community banks, the their credit market debtpercentages that have declined rise in the number of CRE specialists, and the decrease in modestly from peak levels in the mid-1980s (see Chart 5.7). ! ! !!! ! ! In 2011, there were 629 U.S. deposits. ! !!!! ! ! ! !!!! ! ! ! ! !!!! Those community banks located in the West and the Southeast, where more than with no lending specialty or that are multi-specialists one-half of community banks had a CRE lending specialty. !! ! ! ! The nations rural areas point to more than 1,200 U.S. counties (out of a total of continue to be dominated by community banks, where 3,238), encompassing 16.3 million people, who would have community banks have more than 70 percent of both limited physical access to mainstream banking services offices and deposits. ! ! ! ! !! !!! 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. Overall, the volume of external capital raised by 2009. !! Compared with noncommunity banks, the shares of community banks are more likely to be privately owned and closely held. ! ! !!! ! ! The higher the concentra- Summary tion in C&D or total CRE lending in 2005, before the real Community banks shifted the composition of their loan estate downturn began, the higher the incidence of failure portfolios from retail loans to commercial loans during the after 2005. study period, and this shift was mainly due to an increase in the share of loans secured by CRE. ! Noncommunity banks were able to lower such group is community banks that operated continuously their noninterest expenses as a percent of assets in the pre- crisis years by reducing average expenses associated with 3 FDIC calculations based on data from the Bureau of Economic Analy- employees and premises. Table 4.2 illustrates activities also contributes to the gap in earnings. economic growth, and the size of the banking industry itself. !! !! ! ! ! !! Community and 2007 to growth of just 0.03 percent after 2008. banks have retained a smaller portion of their net income as retained earnings over time, as fewer of them came to be organized as mutual institutions and more of them While troubled banks and those preparing for growth or adopted Subchapter S status. !! ! !! Of the more positive retained earnings and dividends. ! ! ! !!! ! ! ! ! ! !!! ! Also, under a program known as the capital raised, the totals discussed in this section include all capital Targeted Investment Program, Treasury provided to Citigroup and Bank raised by institutions with access to TruPS and all capital raised by of America Corporation $20 billion each in addition to earlier CPP institutions with access to the TARP or SBLF programs. !! !! ! ! ! ! ! Lending. !! ! ! !! !! ! !! !! ! ! capital ratio of 6 percent or greater; and has a leverage ratio of 5 percent or greater. ! ! on pretax ROA, but individual bank management deci- sions do as well. ! ! !! ! !!! !! ! ! ! !!! ! ! ! ! ! ! ! !!! ! ! ! ! !! !! ! !! ! ! ! ! ! ! The requirements led them to increase staff over the past ten longer this normalization in rates is delayed, the longer years. ! !! !! ! ! ! !! ! ! ! !!! !!! !! ! ! That year marked the highest efficiency ratio for commu- A recent research paper by FDIC economists further nity banks since the late 1980s and the lowest efficiency explores the causes of the widening efficiency ratio gap ratio for noncommunity banks since at least 1984. ! ! ! ! ! ! !!!!!! ! ! ! ! ! ! ! All of the increase in real ing, with a particular emphasis on loans secured by estate lending by noncommunity banks during this period commercial real estate. !! ! FDIC Community Banking Study December 2012 25, 24 ! !! ! ! ! ! ! ! !! ! ! ! ! ! For administrative purposes, the government allocates all rural counties. ! ! !!! !! ! ! ! ! ! ! !! !!! ! ! ! ! ! ! ! !!!!!! Larger banks may also be able to lower their funding costs by issuing debt directly to the capital markets. Capital levels at both community and ers, but also to add to their capital stock through retained noncommunity banks increased sharply in the early 1990s Chart 6.1 as the industry recovered from the banking and thrift Leverage Capital Ratio, crisis that began in the 1980s and as banks conformed to Federally Insured Community and Noncommunity Banks, 1985-2011 new capital standards under the first Basel capital agree- Leverage Capital Ratio, Weighted Average for Group, at Year-End ment and Prompt Corrective Action (PCA).1 Leverage 20% capital ratios for both groups rose more gradually during Community Banks the years between the banking crises that bookend the 15% study period, as the industry posted record earnings. Most interview participants stated that no one regu- Study Concentration: Regulatory Compliance lation or practice had a significant effect on their Questions institution. ! ! This chapter begins with loans rose from 21 percent of loans to 42 percent. !! ! ! ! ! TruPS began to be more widely issued after a Reform and Consumer Protection Act of 2010 (Dodd- 1996 ruling by the Federal Reserve Board allowing them to Frank Act) required that regulators take steps to exclude be counted as Tier 1 capital at the holding company TruPS from the definition of Tier 1 capital for many bank level.11 holding companies.15 While the holding companies of noncommunity banks Federal Programs to Facilitate Capital Raising. In 1984, the four largest banking organizations held just 6.2 percent of industry assets, but charters they would eventually acquire held another 31.4 percent of industry assets at that time. ! ! ! major exchange or in over-the-counter trading. !! !! The table also breaks down community bank charters, the performance of new banks community banks in each of these groups according to in the baseline specialty groups was somewhat better than their degree of concentration in that loan type as of 2005. that of new community banks pursuing Strategy 1 (C&D) The results not only confirm that the incidence of failure or Strategy 2 (CRE), although new community banks was frequently higher for banks that were already engaged pursuing Strategy 3 also performed well. ! ! ! ! ! !! ! ! !! !! ! Periods during and after reces- while 42 states restricted interstate combinations of bank- sions have been associated with much slower chartering ing charters in 1984, by 1994 only Hawaii retained this activity, with the period from 2009 through 2011 marking restriction.4 The Interstate Banking and Branching Effi- the three slowest years of chartering activity over the ciency (or Riegle-Neal) Act of 1994 allowed full interstate 27-year study period. ! ! !! ! !! ! ! ! ! For purposes of the study, a large MSA is defined as one effectively waived for institutions that fall under the asset size thresh- with a population of more than 500,000. old applied during step 5. Additionally, the literature has increas- ingly focused on estimating the importance of scale economies at the largest bank holding companies, especially since the financial crisis. ! ! !!! ! ! ! !! ! !!!! ! !! ! !!!! ! ! !! ! ! !!! ! 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. 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