Study Offers Hope for Community Banks

WASHINGTON—Small banks may be faring better than their declining numbers suggest, with a new regulatory study finding small U.S. firms are not on the wane despite explosive growth by large banks.

The Federal Deposit Insurance Corp. found there are more banks with assets between $100 million and $1 billion today than there were in 1985, according to a study released Wednesday. That is despite the plummeting total count of U.S. banks, from more than 18,000 in 1985 to less than 7,000 today.

Most of that decline can be attributed to banks under $100 million, suggesting a threshold at which banks have the scale to compete despite their relatively small size.

Smaller institutions still face a raft of challenges, from low interest rates to a less robust mortgage market and new regulatory requirements. But the FDIC offered a more upbeat assessment of those banks’ prospects, finding that community banks are able to cut costs significantly when they pass $100 million in assets—a phenomenon that may explain why institutions of that size haven’t seen a decline in their numbers, the FDIC said.

The decline in overall banking charters suggests “a disaster for small banks, but that’s not what the numbers show if you follow them over time,” said Richard Brown, the FDIC’s chief economist, in an interview.

The study also found that more often than not community lenders giving up their charters have been purchased by other banks with similar business models, suggesting local lenders are growing slightly larger rather than disappearing altogether.

First Oklahoma Bank of Tulsa, Okla., started out when investors acquired the state’s third smallest bank, with about $9 million in assets, in 2009, said Chairman Tom Bennett. Now the bank has $285 million in assets after a strong first quarter of making loans, and Mr. Bennett says he isn’t complaining about regulations. “Somewhere over $100 million you begin to get enough scale that you can absorb the cost,” he said.

The core problems for the smallest firms, he said, are that the slowed-down real-estate market and low interest rates have been squeezing community banks that rely disproportionately on mortgage lending and net interest income for their revenue.

via Study Offers Hope for Community Banks – WSJ.com Article by Ryan Tracy & Stephanie Armour.

Study Offers Hope for Community Banks – PDF

 

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