FDIC Seeks New Definition of Community Bank

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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.

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Comments (7)
What about "community banking" business units at the mega-banks and the regionals? I think Wells Fargo has a "community banking" division, and I'm fairly certain many other mega-banks do, too. -Andy Peters, community banking reporter, American Banker.
Posted by Andy Peters | Thursday, February 23 2012 at 6:04PM ET
The issue with Community Banking is their lack of scale and historical dependence on local real estate lending. With deposits earning nothing, commercial real estate and residential real estate lending at historical lows, and the adverse effects of Dodd-Frank and the negative prospective impact of Basel III, any bank with less than $1 billion in assets is bleak. These banks will either need to merge, sell, or atrophy.

Charles Smith
Managing Partner
Pegasus Intellectual Capital Solutions LLC
Posted by Charles S | Friday, February 24 2012 at 7:33AM ET
Mr. Smith,
Your bleak outlook on smaller banks is not uncommon among the "experts" in our industry. What you fail to see is that community banks have stronger, deeper relationships with their customers than the larger firms. Plus, the big boys are stepping all over themselves when they redline specific industries or business types. They are not able to drill down to individual customers to determine if they are "keepers" or not because they don't know them at the decision making level.
Posted by D GRANT W | Friday, February 24 2012 at 8:50AM ET
This FDIC research approach is refreshing and commendable. The usual definition relying solely on assets was always simplistic and yielded often ridiculous results. There is far more to what makes a community bank than size. It is more approach, style of banking, business model. It seems that the FDIC is trying to pick this up. It is a bit like trying to define "middle class". For discussion purposes we all have kind of sense of what we mean by it, but be wary trying to define it, and using income as the measure will be likely to lead one astray.

As a research and investigative tool this will be valuable. Flexibility of application and recognition of unexpected results can be accommodated in that setting. Hopefully this will not turn into a definition that finds its way into laws and regulations, however, where the problems with carving such definitions in legal stone will become quickly apparent. In the regulatory application, we need approaches that are far more flexible, in order to accommodate the very wide variety in bank types and business models that support the wide variety of bank customers in America. Rural communities, suburban communities, and urban communities are all different in important ways, and we fortunately have banks that meet those differences. We need a regulatory program that is flexible enough to recognize and encourage all of those varieties.
Posted by WayneAbernathy | Friday, February 24 2012 at 9:37AM ET
I respectfully take issue with the note posted by Charles Smith. These banks continue to prosper throughout much of the country - in part due to the partnerships in which they engage with the various "bankers' banks" across the nation. It's a system that works and the "little guys" still have a place in this equation. It's what makes our country great and keeps the "big guys" honest.
Posted by Johnny Tremaine | Friday, February 24 2012 at 9:40AM ET
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