WASHINGTON — The Federal Deposit Insurance Corp. is embarking on an ambitious study to better understand community banks in this country, but observers may be surprised at which institutions made the cut.
In launching the study — part of a broader agency effort to reach out to community banks — FDIC researchers are looking beyond just how big a bank is to decide whether to include it.
While community banks are traditionally defined strictly in terms of their size, the FDIC is choosing a more nuanced model. Though there is a general cut-off of $1 billion of assets, banks above that threshold may still be considered "community" if they have a narrow geographic scope and high amounts of loans and core deposits. Firms below that level, however, are not automatically included if they lack high loan levels and core funding or have a narrow purpose.
"We wanted our community bank research project to be based on a common definition of a community bank" but "we wanted to get away from size as a sole determinant of what is and what is not a community bank," Richard Brown, the agency's chief economist, said last week at an FDIC conference on community banking where the study's initial finding were unveiled.
Besides establishing a new definition of community banks, the study's early findings confirm the impact of consolidation on smaller institutions, while offering signs of the sector's continued prosperity.
It also identifies the Midwest as the region where community banks are most prevalent, and provides data on which types of community banks have been most prone to failure.
Brown said looking at more than size allows researchers to also consider characteristics of an institution's business model that are unique to community banks.
"One of those attributes is a primary focus on lending and deposit-gathering. Another attribute is a relatively limited geographic scope of operations," he said. "Community bankers tell us that they have local ownership, they make decisions locally and it's based on their knowledge of the local market area. They also tell us there is a different way of doing business at community institutions. Some researchers … have described" community banking as more "relationship lending instead of transactional lending."
In a further sign of concentration of industry assets in the biggest firms, the study's early findings show that non-community banks on average are 64 times larger than community banks ($17 billion compared with $280 million.) By contrast, that size disparity was just 12 times in 1985.
"While community bank assets grew by one third over this period, the non-community banks saw their total assets grow by four and a half times," Brown said.
But Brown also shared more optimistic indicators for the sector, including that among banks that had under $100 million of assets in 1985, more of them are still operating today compared with other asset classes.
"How is it that the smallest group of institutions can survive more often, and fail and merge less often, than any other sized group, and still account for all of the net decline in the number of charters during that period?" he said. "The answers in a nutshell are growth and new charters. Of the institutions that started out with under $100 million in assets, some 20% of them — almost 2,900 institutions — survived the entire period and grew into one of the larger size groups."
The FDIC's research definition for "community banks" starts with a cutoff of $1 billion of assets, which is a common approach for other academic work, Brown said. But smaller companies with either 10% foreign assets-to-total assets, over half of their operations in specialty charters such as industrial loan companies or a lack of any loans or core deposits were canceled out. Bigger organizations were added if they had at least 33% loans-to-assets, 50% core deposits-to-assets, less than 75 branches and other factors reflecting a narrow geographic scope.
As a result, 330 larger institutions were part of the FDIC's analysis. The list included three banks each with roughly $10 billion of assets: the $11.6 billion-asset Signature Bank in New York City, the $9.8 billion-asset Capitol Federal Savings Bank in Topeka, Kan., and the $9.6 billion-asset Investors Savings Bank in Short Hills, N.J. Ninety-two companies underneath the $1 billion-asset cutoff, meanwhile, were excluded. (The sizes were based on yearend 2010 data.)
"As a percent of the total number of banking organizations, these are not huge changes. But we were able to add back more than half of the eligible organizations with assets over $1 billion," Brown said. "These institutions are performing community banking functions and would have been left out of a simple size-based definition."
Randy Dennis, a banking consultant in Little Rock, Ark., said the definition could be even more liberal.