A Disproportionate Burden on Community Banks

Recently the Federal Deposit Insurance Corp. released its fourth quarter 2015 Quarterly Banking Profile. This document, a compilation of banking industry data gleaned from call reports, is interesting to review each quarter. It seems that any numeric data regarding banks can be found in this quarterly report.

One aspect of this report that I find interesting is that the FDIC goes to great lengths to report the performance of all banks in total and of community banks specifically. FDIC has its own definition of a community bank. It is fairly complex, but it is consistent from report to report, so it will suffice for comparative purposes. During 2015 the banking industry made a net profit of $163.7 billion, of which $40.8 billion was in the fourth quarter. Earnings were generally consistent throughout the year. Community banking saw a net profit of $20.4 billion for the year, of which $5.1 billion was in the fourth quarter. Again, pretty consistent throughout the year. For an industry that was struggling so badly just a few years ago, these earnings are impressive.

However, these earnings are partly why banking has had difficulty in its plea for regulatory relief, but that should not be the case. Instead, legislators need to look harder at the data. While the entire banking industry needs regulatory relief, most of the efforts have been to obtain that relief for community banks. If we look at the data a little deeper, we find that there are 6,182 banks remaining in the United States as of Dec. 31, 2015. Of those, 5,735 have been determined by the FDIC to be community banks, leaving only 447 non-community banks. Those 447 banks (7.23 percent) earn 75 percent of all of the net profit in the industry. It stands to reason that the other 92.77 percent of banks, which are earning only 25 percent of the industry profits, simply cannot provide the same level of regulatory compliance as their larger brethren.

There is, also, lots of data that can be broken out by state. There were 119 Indiana-headquartered bank charters at year-end that collectively earned $800 million in 2015. I believe that all of the banks headquartered in Indiana are considered community banks by the FDIC definition, so those earnings represent a 1.01 percent return on year-end assets. Nationally this number was 1.03 percent. The state data can be broken down by size and, consistent with the national data, the Indiana data show that smaller banks are not doing as well as larger banks. Indiana is fortunate to have several banks headquartered in our state that are in excess of $1 billion in assets.

What does this statistical analysis show? It verifies that what has been happening for the past several years is continuing. There are fewer banks each year, and larger banks continue to be more profitable. By “larger banks,” I do not mean only the very big. A $500 million bank is likely to be more profitable than a $100 million bank. A $1 billion bank is likely to be more profitable than a $500 million bank. It is not an absolute when comparing one bank to another but, industry-wide, it certainly is the trend. Consolidation will continue for some time; there were 77 fewer community banks in the last quarter of 2015, only two of which were gone due to failure. Clearly, if we are to protect our unique system of delivering financial services, Congress must act to curb the stifling regulatory burden on community banks.

– S. Joe DeHaven

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: