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The FDIC Community Banking Research Project

FDIC Future of Community Banking ConferenceFebruary 16, 2012

Community Banking by the Numbers

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Outline

•

Bank size and long-term industry consolidation

•

Defining the community bank for research purposes

•

A snapshot of U.S. community banks

•

Structural changes over time

•

Performance comparisons over time

•

Directions for future research

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-

2,500

5,000

7,500

10,000

12,500

15,000

17,500

20,000

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Assets < $100 millionAssets $100 million To $250 millionAssets $250 million to $1 billionAssets $1 billion to $10 billionAssets > $10 billion

198513,631

2,5471,289

53036

18,033

20102,6252,4741,893

559107

7,658

Number of FDIC-Insured InstitutionsBy Size Group

Source: FDIC

All of the net decline in FDIC-insured institutions since 1985 has come from banks under $100 million.

Number of Institutions

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What happened to the 18,033 federally-insured banks and thrifts that operated at year-end 1985? (By 1985 asset size group)

22.7%

28.7%24.3%

27.2%

13.9%

0%

10%

20%

30%

40%

<$100M $100M-$250M

$250M-$1B $1B-$10B >$10B

Consolidated Within Company

9.9%12.6%

18.3%

21.3%

11.1%

0%

5%

10%

15%

20%

25%

<$100M $100M-$250M

$250M-$1B

$1B-$10B >$10B

Failed

Source: FDIC

36.0%

21.8%

12.3% 11.9%

19.4%

0%

10%

20%

30%

40%

<$100M $100M-$250M

$250M-$1B

$1B-$10B >$10B

Still Operating

29.5%33.8%

37.0% 34.5%

52.8%

0%

10%

20%

30%

40%

50%

60%

<$100M $100M-$250M

$250M-$1B

$1B-$10B >$10B

Merged

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What Is a Community Bank?

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Common definition: Total assets < $1 billion–

Size threshold needs to be indexed over time

–

Shortcomings:•

Includes some non-community banks•

Excludes some banks that look like community banks

•

Needed: A better conceptual definition–

Not purely

a function of size

–

Associated with basic banking functions of deposit gathering and lending

–

Business within a fairly circumscribed geographic area–

Emphasis on “relationship banking”

vs. “transactional

banking”

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FDIC Research Definition

Exclude:•

Any organization with:–

No loans or no core deposits–

Foreign assets > 10% of total assets

–

More than 50% of assets in certain specialty banks, including:

•

credit card specialists•

consumer nonbank banks•

ILCs•

trust companies•

bankers banks

Include: •

All remaining banking organizations with:–

Total assets < $1 billion (indexed over time)

–

Total assets > $1 billion where:•

Loan to assets > 33%•

Core deposits to assets > 50%•

1 < Offices ≤

75•

Number of large MSAs

with offices < 3

•

Number of states with offices< 4

•

No single office with deposits > $5 billion

Designate community banks at the level of the banking organization –

the decision-making unit.

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Where Do These Criteria Take Us?

330 organizations

6,196organizations

6,526organizationsdesignated as “community institutions”

7,016 chartersout of 7,658 total

264 organizations

Large organizations that did not meet tests

for loans-to-assets, core deposits or

limited geography.

Year-end 2010

Excluded: no loans, or no core deposits,

or certain spec. group

34 large

organizationsexcluded

92 small

organizationsexcluded

Siz

e $ 1 billion

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Community banks have declined just slightly since 1985 as a percent of all banking organizations, from 97 to 94 percent.

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Non-Community BanksLarge Community Banking OrganizationsSmall Community Banking Organizations

Source: FDIC Community Banking Research Project

13,128 community banking organizations under $250

million in 1985

1,137 community banking organizations over $250

million in 1985

6,196 community banking organizations under $1

billion in 2010

330 community banking organizations over $1 billion in

2010

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The total assets of non-community banks have grown much faster than those of community banks since the early 1990s.

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Non-Community Banks

Large Community Banking Organizations

Small Community Banking Organizations

Source: FDIC Community Bank Research Project

Total Assets, Dollars in Billions

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Snapshot of U.S. Community Banks

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How big are they?

•

Where do they operate?

•

What do their balance sheets look like?

•

What business lines do they specialize in?

•

How often do they fail?

•

How has industry structure changed since 1985?

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0

2

4

6

8

10

12

14

16

18

20

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Source: FDIC Community Banking Research Project

Average Asset Size (Dollars in Billions)

Other Banks

Community Banks $0.28 billion

$17.7 billion

12 times larger

64 times larger

Community banks tend to be small, and the size disparity with other banks is growing.

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Where Do Community Banks Operate?

Source: FDIC Summary of Deposits

Community Bank Share of All Branches Operating Within State as of 2Q 2010.

13Source: FDIC Community Banking Research Project

Comparing Balance Sheet StructureWeighted Averages, Year-End 2010

Average Loans to Assets

64%

52%

0%

20%

40%

60%

80%

100%

CommunityBanks

Other Banks

Average Core Deposits to Assets

79%

50%

0%

20%

40%

60%

80%

100%

CommunityBanks

Other Banks

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Community banks have traditionally held more capital, on average, than other banks.

0%

2%

4%

6%

8%

10%

12%

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Community Banks

All Other Banks

Core Capital (Leverage) Ratio, Percent

Source: FDIC Community Banking Research Project

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0.0%

1.0%

2.0%

3.0%

4.0%

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Source: FDIC Community Banking Research Project Year-End

Failures During the Succeeding Year as a Percent of Institutions at Year-End

Other Banks

Community Banks

26-Year Average Annual Failure RateCommunity Banks: 0.69%Other Banks: 0.66%

The long-term failure rate for community banks is comparable to that of other banks.

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4% 8%22%

60%

3%2%

0%10%20%30%40%50%60%70%

Survived to 2010 Failed Merged Consolidated Other Exit

Percent of Other Banks Reporting at Year-End 1985

As Community

Bank

12%32%

18%

34%

3%

2%

0%10%20%30%40%50%60%70%

Survived to 2010 Failed Merged Consolidated Other Exit

Percent of Community Banks Reporting at Year-End 1985

As Community

Bank

As Other Bank

Source: FDIC Community Banking Research Project

What Happened to Community Banks and Other Banks that Reported at Year-End 1985?

12%32%

18% 3%

Failed Merged Consolidated Other Exit

Exited Industry Before Year-End 2010

8%22%

60%

3%

Failed Merged Consolidated Other Exit

Exited Industry Before Year-End 2010

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Change in percent share among main community bank specialty groups, 1985-2010

0%

10%

20%

30%

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Percent of All Community InstitutionsCRE Specialists

Mortgage Specialists

Ag Specialists

C&I Specialists

Consumer Specialists

Source: FDIC Community Banking Research Project

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16%

1%

26%

2%

15%

9%6%

31%

6%

2%

0%

5%

10%

15%

20%

25%

30%

35%

MortgageSpecialists

ConsumerSpecialists

CRE Specialists C&I Specialists Ag Specialists

Community BanksOther Banks

Source: FDIC Community Banking Research Project

Comparing Community Banks and Other Banks by Business Specialty Breakdown

Percent of Institutions in Each Business Specialty Group Year-End 2010

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-2.00%

-1.50%

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

1986-1990 1991-1995 1996-2000 2001-2005 2006-2010

Source: FDIC Community Banking Research Project

Five Year Averages for Pre-tax ROA, By Community Bank Single-Specialty Groups

Ag Specialists

CRE Specialists

Consumer Specialists

C&I Specialists

Mortgage Specialists

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Percent of Failures Accounted for by All Single-Business Line Specialists, by Five-Year Period

7%1%

17%

0% 2%0%

10%20%30%40%50%60%70%

1986-1990

1991-1995

1996-2000

2001-2005

2006-2010

Ag Specialists

102 4 4 0 6Gross Number of Bus. Line Failures in Period

16%8%

13%

30%

2%0%

10%20%30%40%50%60%70%

1986-1990

1991-1995

1996-2000

2001-2005

2006-2010

C&I Specialists

230 43 3 6 5Gross Number of Bus. Line Failures in Period

13%18%

0%

10%

66%

0%10%20%30%40%50%60%70%

1986-1990

1991-1995

1996-2000

2001-2005

2006-2010

CRE Specialists

186 92 0 2 213Gross Number of Bus. Line Failures in Period

19%

31%

17% 20%

7%

0%10%20%30%40%50%60%70%

1986-1990

1991-1995

1996-2000

2001-2005

2006-2010

Mortgage Specialists

283 160 4 4 24Gross Number of Bus. Line Failures in Period

Source: FDIC Community Banking Research Project

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-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Community Banks

All Other Banks

Pre-Tax Return on Assets, 1985 - 2010

Source: FDIC Community Banking Research Project

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Community Bank Earnings Performancevs. All Other Banks, 1985 - 2010

0.0%

1.0%

2.0%

3.0%

4.0%

1985 1989 1993 1997 2001 2005 2009

Provision Expense to Assets

0.0%

1.0%

2.0%

3.0%

4.0%

1985 1989 1993 1997 2001 2005 2009

Noninterest Income to Assets

0.0%

1.0%

2.0%

3.0%

4.0%

1985 1989 1993 1997 2001 2005 2009

Noninterest Expense to Assets

0.0%

1.0%

2.0%

3.0%

4.0%

1985 1989 1993 1997 2001 2005 2009

Net Interest Income to Assets

Community Banks

All Other Banks

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Community Banks

All Other Banks

Efficiency Ratio, 1985 - 2010

Source: FDIC Community Banking Research Project

Noninterest Expense

Net Operating RevenueEfficiency Ratio =

Net Operating Revenue = Net Interest Income + Noninterest Income

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Community Bank Earnings Performancevs. All Other Banks, 1985 - 2010

0.0%

1.0%

2.0%

3.0%

4.0%

1985 1989 1993 1997 2001 2005 2009

Noninterest Income to Assets

0.0%

1.0%

2.0%

3.0%

4.0%

1985 1989 1993 1997 2001 2005 2009

Noninterest Expense to Assets

0.0%

1.0%

2.0%

3.0%

4.0%

1985 1989 1993 1997 2001 2005 2009

Net Interest Income to Assets

Community Banks

All Other Banks

0.0%

1.0%

2.0%

3.0%

4.0%

1985 1989 1993 1997 2001 2005 2009

Provision Expense to Assets

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Directions for Future Research

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Bank cost structure and economies of scale

•

Successful business models

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Alternative bank performance metrics

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Factors that make community banks unique

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Connections to local communities

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The small business economy

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Rural depopulation

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Role and use of technology

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Lessons of the crisis