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FDIC Report: Resilience of Community Banks Withstands Consolidation Trends

George A. LeMaistre
Jones Walker LLP - Mobile Office

April 23, 2014

Previously published on April 17, 2014

Consolidation in the banking industry over the past three decades "has had much less impact on the community banking sector than is commonly believed," according to a report released last week by the Federal Deposit Insurance Corporation.

"After more than 30 years of industry consolidation," the report declares, "community banks still serve as vital sources of credit for small businesses and providers of banking services to communities that might not be served by noncommunity banks. The available evidence strongly suggests that they will continue to carry out these important functions for the foreseeable future."

Prepared by personnel in the Corporation's Division of Insurance and Research, the report analyzes consolidation trends between 1985 and 2013 and their effects on community banks, using a "functional definition" of community banking from a 2012 FDIC study. Rather than defining community banks solely on the basis of asset size, the 2012 study says they are denoted also by other common characteristics. Every such institution typically engages principally in "basic lending and deposit gathering," and ordinarily will have a ratio of total loans to assets that exceeds 33 percent, and core deposits greater than 50 percent of total assets.

Under the definition, community banks also are institutions that operate within a limited geographic scope, and the total number of offices of any such bank must remain within a specified maximum, and with a maximum level of deposits at any single office. These maximum levels, and other metrics used in the definition, were adjusted throughout the period encompassed in the study, to account for effects of inflation and general economic growth. Community banks in 1985, for example, could include institutions with up to 40 offices, while, by 2010, they could have as many as 75. The median asset level of community banks more than quadrupled during the period, from $40 million in 1985 to $167 million in 2013.

According to the FDIC report, the proportion of community banks among all FDIC-insured banks increased from 87 percent at year-end 1985 to 93 percent at year-end 2013. In contrast, the share of banking offices operated by community banks, and of industry assets held by them, declined over the same period. In 1985, 53 percent of all banking offices were operated by community banks, but that share had fallen to 35 percent by 2013. Similarly, the share of industry assets at community banks dropped from 37 percent in 1985 to 14 percent in 2013.

The report says the most dramatic effects of consolidation have been evident in the very largest and the very smallest banks. From 1985 to 2013, the number of institutions with assets of less than $25 million declined by 96 percent, from more than 5,700 to barely 200, and the number with assets between $25 million and $100 million fell by 77 percent, while, during the same period, the percentage of bank assets at institutions with more than $10 billion in assets nearly tripled, from 28 percent in 1985 to 81 percent in 2013.

Based on year-end 2013 call reports, more than two-thirds of the nation's community banks—68 percent—had assets between $100 million and $10 billion. It is this sector of the industry that, according to the report, since 1985 also has experienced growth both in the number of banks and in their total assets.

"Community banks," the FDIC report concludes, "have, in fact, remained highly resilient amid the long-term trend of banking industry consolidation. While their share of industry assets has declined over time, they are disproportionately important providers of credit to small businesses and serve hundreds of counties and thousands of communities that are overlooked by larger noncommunity institutions. While the overall trend of consolidation may well continue, it appears unlikely to diminish the importance of community banks or the role they play in our financial system."


The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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