The Economic Performance of Small Banks, 1985-2000

Abstract

Several trends in the financial industry over the past decade and a half have potentially threatened the competitiveness of small banks. Among these developments are the numerous mergers that increased the size and scope of large banks and the increased competition from mutual funds and other nonbank financial institutions. This article examines the economic performance of small banks during the 1985-2000 period by focusing on their ability to attract and profitably intermediate insured and uninsured deposits. It finds that the expansion of deposits and assets at small banks, when adjusted to account for the effects of mergers on measured growth, has consistently exceeded the growth at large banks. Moreover, the profitability of small banks has remained high over the period. These indications of strength among small banks as a whole also hold true for subgroups within the small bank sector. Aside from their success in attracting deposits, the key reasons for the generally good performance of small banks in recent years appear to be their ability to earn relatively high rates of return on their loans and an increase in the share of their portfolios devoted to loans.

Community Bank Performance: How Important are Managers?

“…One result found in multiple studies is that the very smallest banks underperform other community banks, where performance is measured by return on assets, return on equity, riskadjusted profits or an efficiency ratio. (See, for example, Barrett and Brady, 2001;DeYoung, Hunter and Udell, 2004;FDIC, 2012;Hein, Koch and MacDonald, 2005;Kupiec and Lee, 2012;Stiroh, 2004;Whalen, 2007.) Some of these studies restrict their samples to banks that have been in existence for at least a decade, so this result cannot be attributed to the typically low profitability of new banks. Rather, the poorer profitability of the smallest community banks (defined as those under $100 million in assets) is generally attributed to operation at less-thanefficient scale.…”

“…Compared to large banks, small banks, on average, grow faster; rely more heavily on core deposits; have higher capital ratios; have lower return on equity but not necessarily lower return on assets; and have fewer credit card loans and fewer securitized loans, but more small business and agricultural loans. (See, for example, Barrett and Brady, 2001;Barrett and Brady, 2002;andDeYoung, Hunter andUdell, 2004.) Berger, Miller, Petersen, Rajan andStein (2005) find that large banks tend to lend at larger distances and for shorter terms than small banks, while small banks are more likely to lend to credit-constrained firms and to be the exclusive lenders to small borrowers.…”

“…Some research uses $500 million in assets as the cutoff between small (or community) and large banks, and a few papers use even smaller levels, such as $300 million or $400 million, but these lower cut-offs usually refer to assets from the 1990s or earlier. Two papers byBrady (2001 and2002) use definitions that are not based on a specific size, defining community banks as all commercial banks other than the 1000 largest; this translated into banks under about $330 million in assets at the time of these studies.…”

Growing the community bank in the shadow of national banks: an empirical analysis of the U.S. banking industry, 1994–2018

“…Community banks (Avery and Samolyk, 2004; Cutcher, 2014) are defined by the Federal Deposit Insurance Corporation (FDIC) to have scarce total assets, to have a corporate presence in only a limited geographic region of the USA and to focus their activities mainly on loans and deposits for their direct customer base [1]. Relative to national banks [2] (Marquis and Lounsbury, 2007), community banks are generally less scale efficient (Amel and Prager, 2016; Barrett and Brady, 2001; DeYoung et al , 2004; Stiroh, 2004) and less prepared to adapt to substantial industry environment disruptions (DeYoung et al , 2004; Hughes et al , 2016). Despite these inherent resource disadvantages, community banks can find success by building strong community ties, loyal customer relationships and an in-depth understanding of local market needs (Berger et al , 2004).…”