This report, the second in a series comprising the FDIC's Future of Banking Study, notes that while community bank charters have been halved in the consolidation wave, they still comprise the vast majority of banks in the United States and provide vital services to the small business and agricultural sectors.
The declining number of U.S. banking organizations: Will the trend continue? Over the last quarter of a century, the structure of the U.S. banking industry has undergone an almost unprecedented transformation -- one marked by a substantial decline in the number of commercial banks and savings institutions and a growing concentration of industry assets among a much smaller number of extremely large financial institutions. After remaining fairly stable since the 1930s, the number of federally insured banks and savings institutions began to decline rapidly in the mid-1980s. At the beginning of 1984, there were 15,101 banking and thrift organizations (defined as commercial banks, thrifts, and bank and thrift holding companies). By year-end 2003, that number had fallen to 7,842 -- a decline of almost 50 percent Distributed by size, nearly all the decline occurred in the community-bank sector (organizations with less than $1 billion in assets), and especially among the smallest size group (less than $100 million in assets).
Community banks: Their recent past, current performance and future prospects Although the number of community banks (community banks are defined as independent banks and savings institutions and bank and savings institution holding companies with aggregate assets less than $1 billion) has declined significantly, they still comprise 94 percent of the banking industry, a figure essentially unchanged from 1985. Moreover, detailed analysis of the changes in the number of community banks revealed that community banks in 2003 had maintained a proportionally similar presence in all types of markets -- urban, suburban and rural -- and this remained true for markets that experienced both population growth and decline; in addition, there was only a slightly greater decline in community banks in formerly unit-bank states in comparison to non-unit-bank states. Community banks' deposit share declined significantly since 1985, during a time when large banks greatly extended their reach throughout the country (See Table 1). Community banks' ability to provide personal service to depositors continues to be one of their strengths, allowing them to continue to play an important role in local deposit markets, albeit a smaller one than before. Although the asset share of community banks also dropped, an examination of community bank lending demonstrates that they continue to have a stable share of real estate lending to businesses, and continue to provide a disproportionate amount of credit to the small business and agricultural sectors. Success in these sectors is due to the ability and willingness of community banks to assess the creditworthiness of borrowers who may have been traditionally ignored by larger banks or who have been dissatisfied with the services provided by larger banks. Typically, these borrowers do not have the types of credit histories or financial reporting mechanisms that fit the model-based lending approaches used by many larger banks. As such, they react positively to the relationship-based lending practiced by community banks. The earnings performance of community banks since 1985 has until very recently been comparable to that of the very largest banks. Over the past decade, it has been stable, with a return on assets of at least one percent, a level that many industry observers would term "satisfactory." Moreover, this is true even in areas that have experienced population declines. Additionally, the market has provided an impressive case for the continued presence of the community bank in today's banking landscape: more than 1,200 new community banks have been established since 1992. New bank owners have therefore been willing to risk their capital in these ventures, and often have done this in areas where existing community banks have been acquired by large and distant banks to take advantage of customers who may find the business practices of large, non-local banks to be unsatisfactory. Community banks do face challenges. Many community bankers state that it is difficult to both find and retain qualified employees. Competition with large banks and non-bank competitors, including credit unions, will continue. The fixed costs of regulatory requirements fall more heavily on community banks than on larger ones. Regulatory burdens could, therefore, have a significant negative effect on community banks' future prospects. Nevertheless, the evidence from the recent past about community banks' market presence, industry share, and earnings performance, coupled with the continued creation of new community banks, points strongly to community banks being a viable business model in the future.