WASHINGTON Detecting trends using data on the overall financial services industry is a tricky business, in part because the actions of the largest banks have a way of distorting the results for everyone else.
When JPMorgan Chase changes its projection for the bank's legal expenses, industry income moves by billions of dollars. Fee increases at the biggest banks can boost overall noninterest income but mask loan growth for community banks.
It is that stark variation between big and small that has spurred the Federal Deposit Insurance Corp. to significantly alter how it reports quarterly earnings. The FDIC's Quarterly Banking Profile will still contain comprehensive data on all 6,730 banks, but last week's first-quarter report included a new section which officials say will be a permanent addition focused exclusively on the 6,234 banks that control just 14% of industry assets.
The numbers for smaller institutions "sometimes get obscured by the aggregate industry data because, even though it's a large number of banks, it's a very small percentage of the assets," said Diane Ellis, who directs the FDIC's insurance and research division. "There is still a demand and need for understanding the aggregate industry performance, which really is driven by the largest banks. So getting this breakdown for community banks tells you the other story."
The first installment of the new supplement part of a series of recent FDIC initiatives to focus on smaller institutions already illustrates compelling differences between large and small bank performance. Like everyone else, community banks were hurt by lower mortgage revenues related to a refinancing slowdown. But because they are more focused on "relationship-based" banking than their larger brethren, small institutions demonstrated noticeably higher loan balance growth, net interest income gains and lending margins. Community banks' total loan growth, compared with 12 months earlier, of 6.6% was nearly double that of the industry as a whole.
"Net interest income at community banks accounts for 80% of their net operating revenues. It's a very large piece of their operating revenues, as opposed to the noninterest income," said Philip Shively, an associate director in the FDIC's insurance and research division. "That really highlights a major difference right there."
Community bank advocates hailed the new section, saying it highlights a needed distinction between community banks which, based on the FDIC's definition, are 93% of the industry and top-tier institutions.
"One outlying event at one large bank can skew all the numbers," said Terry Jorde, senior executive vice president and chief of staff at the Independent Community Bankers of America. "There are really two stories. It absolutely makes a lot of sense for the FDIC to segregate out the performance profiles for the lion's share of the bank charters."
Observers also expressed hope it will further the debate over whether banks with a simpler business model should get relief in complying with recent regulations.
"This will further put a spotlight on the fact that the two industries are indeed different and community banks should be regulated differently," said Jeffrey Gerrish, a community bank attorney and consultant based in Tennessee. "There is a fair amount of momentum in Congress and other places. This will help."
The report said first-quarter community bank earnings totaled $4.4 billion. While that was 1.5% less than the year-earlier total, the industry's overall profit suffered a more painful 7.6% decline from its year-earlier total. Community banks' net interest income growth of 5% was well above the industry's 0.3%, and their average net interest margin of 3.57% was 40 basis points more than the industry standard. Compared with the fourth quarter of 2013, loans grew by 0.9%, compared with 0.5% for the industry as a whole. Commercial and industrial loans grew by 1.6%, compared with 1% for the industry.
The new section is a continuation of broad research the FDIC has done on the community bank sector over the last couple of years, including a 2012 study looking at the evolution of community banks since the mid-eighties. That study was followed by reports on the effects of community bank consolidation and the impact on smaller institutions of population trends in rural areas. The research efforts have been combined with new FDIC training opportunities for community bank board members and limited steps to make the agency's supervisory policies more streamlined for community banks.
Like in its earlier studies, the FDIC is not looking only at size in determining which banks to include in the new quarterly data section. Although the vast majority of those included fall under a traditional asset cutoff for community banks of $1 billion, the FDIC broadened the definition based on community banks' particular business models. As a result, certain specialty banks are excluded regardless of size, and many larger institutions that focus on traditional banking services were included. As of the end of the first quarter, 352 banks with over $1 billion in assets still met the criteria.
Whereas the FDIC had said it would update the data from its 2012 study on an annual basis, officials said including the new section in the QBP provides a snapshot of the community bank sector more quickly.
"This is more timely. We did a look-back at 2012 performance; we didn't get it out until almost the end of 2013," said FDIC chief economist Richard Brown. "We've developed a way to update this designation basically in real time."