Washington Watch


Behind the Numbers

Delving deeper, FDIC study reveals the long-term resiliency of community banking amid industry consolidation

By Chris Cole

Just because the industry has been consolidating doesn’t necessarily bode badly for the long-term future of community banks or the relevance of their relationship-based business model.

On the heels of the release of an FDIC study examining the effect of industry consolidation for the country’s community banks, top FDIC officials and ICBA executives agree that while many of the smallest community banks have been merging among each other (and therefore creating larger community banks from those that remain), the community banking industry overall maintains a strong, positive outlook, especially for community banks with assets over $100 million.

“Despite the fact that consolidation has been a steady, long-term trend in our industry, especially among the very smallest banks under $25 million in assets, community banking remains, and will continue to be, a very strong business model,” points out Terry J. Jorde, ICBA’s senior executive vice president and chief of staff.

The FDIC study, released in April, finds that the number of community banks with assets between $100 million and $1 billion actually rose by 7 percent between 1985 and 2013, growing total assets by 27 percent during that period. Meanwhile, community banks with assets between $1 billion and $10 billion increased by 5 percent, with this segment increasing its total asset size by 4 percent.

Community banks actually make up 93 percent of FDIC-insured institutions—a higher percentage than in 1985.

However, the study also found that the number of community banks with less than $100 million in assets declined by 85 percent over the same time period. Those with assets less than $25 million declined from 5,717 to just 205. Meanwhile, reflecting one of the industry’s and the country’s greatest ongoing dangers of overconcentration from too-big-to-fail institutions, the 10 largest megabanks increased their share of industry assets from 19 percent in 1990 to 56 percent last year.

Nevertheless, while it’s obvious how the country’s largest megabanks have grown to dominate in terms of asset size over the past three decades, how well the community bank market has flourished during the same period has been less examined. Indeed, if you define community banks in terms of their activities and geographic footprint, and not just according to their asset size, community banks actually make up 93 percent of FDIC-insured institutions—a higher percentage than in 1985, points out Richard Brown, the FDIC’s chief economist.

“Using this definition, we found that community banks have had an attrition rate over the last 10 years that was less than half that of the larger non-community banks, and that when a community bank is acquired, almost two times out of three the acquirer is another community bank,” Brown explains.

The bottom line from the FDIC’s study is that community banks have been much more resilient to the long-term trend of industry consolidation than is commonly believed. The study’s analysis confirms ICBA’s view that the community banking industry will remain strong and thriving, but it also shows that community banks with $100 million to $1 billion in assets represent the “sweet spot” where the greatest number now operate.

One of the most revealing findings of the FDIC’s research is the fact that the net rate of charter attrition among community banks over the past decade has been less than half that of non-community banks. Another key takeaway from the agency’s study: Consolidation among community banks is not a recent, post-crisis development but a continuous trend over the past 30 years.

The FDIC attributes industry consolidation primarily as an outgrowth of three factors:
voluntary institution mergers, which peaked in the 1990s as geographic restrictions on banking were eliminated;
bank failures, which have occurred in two main waves (1980s to early 1990s and since 2007); and
new charters, a highly cyclical factor that has slowed net consolidation over time.

“Our study shows that consolidation is, in fact, a long-term trend, and that the community banking model has been highly resilient amid this trend,” Brown says.

Consolidation—among community banks and among regional and nationwide banks—is likely to continue going forward. But the two factors that have contributed most to recent consolidation—Wall Street crisis-related failures and an abrupt near end to new bank charters since the crisis—are attributable to temporary factors that should not persist once the effects of the crisis are fully behind us. Furthermore, ICBA has been advocating for a more flexible FDIC supervisory process for de novo applicants that is tailored to the risk profile and the business plan of the applicant, and hopefully those efforts will result in more new bank charters.

After more than 30 years of dramatic industry consolidation, community banks make up 93 percent of FDIC-insured institutions, and they hold the majority of deposits in rural and “micropolitan” counties with populations up to 50,000. They also provide almost half of the industry’s small loans to U.S. farms and businesses.

Moreover, more than 600 U.S. counties would have no FDIC-insured banking offices if not for community banks operating in those markets. That statistic found in the FDIC study, among others, shows that community banks remain pivotal and highly relevant to the U.S. economy, in spite of the industry’s long-term industry consolidation.

However, to address the burgeoning impact of regulatory burden on consolidation, ICBA will continue to advocate for a tiered regulatory and supervisory system that recognizes the significant differences between community banks and larger, more complex institutions in terms of the risks they pose to consumers and to the financial system.

Chris Cole (chris.cole@icba.org) is ICBA’s executive vice president and senior regulatory counsel.