Interesting Trend in Community Banking

10/20/2014 - By Paul Allen, CPA

Unless you've made a concerted effort not to read or watch the news, you have probably noticed the rather dramatic changes in the banking industry over the past couple of years. The dramatic reduction in the number of community banks in the United States has been covered extensively by the media during this last round of bank failures since 2008; however, you may not have noticed that the overall number of banks has been steadily declining since the mid-1980's. From about 15,000 banks in the mid-1980's, we've seen a consistent drop in the number, to below 7,000 FDIC-insured banks and thrifts in the U.S. currently. That doesn't mean the financial assets of banks have declined (US banking assets climbed from about $2.5 trillion to $9.3 trillion in 2009), rather, there's been significant consolidation in the banking industry, with the largest banks getting much bigger, a significant number of banks failing or merging, and far fewer local, traditional community banks.

One segment of banking which has not experienced the same decline is the number of Sub S banks; they grew to about 2,500 earlier in this decade, and remain at that level. As the total number of banks have declined, the percentage of Sub S banks compared to all banks has increased to approximately one-third. Perhaps more interesting, the performance and profitability of Sub S banks have outpaced the performance of the rest of the banking industry by much more than just the impact of taxes (Sub S banks report only pre-tax income, since the income is passed to, and taxes paid by, their shareholders).

Most banking analysts attribute the better performance to a smaller group of shareholders, which may cause better alignment of shareholder interest and management goals, perhaps allowing the individual bank to "stick to its knitting" in the products and services and markets they serve, as well as being a bit more attuned to expense control and a bit less oriented to rapid growth. There might also be an argument that more Sub S banks tend to be located in slower growing markets, and are less likely to be oriented to a "grow it and sell it" strategy, often being owned by a few families or like-minded shareholders.

Whatever the reason that Sub S banks appear to have survived more gracefully through the most recent banking cycle, you might want to take note of this subset of US community banks. Against the trend of "bigger is better", some community banks have quietly stuck to products and programs they know, and have continued to serve their communities and customers well, in spite of some tough times. And that is a lesson we can all learn from.

To learn more information about these trends and how you may take advantage of opportunities available to you, contact a Bank Advisor at (800) 477-7458.

-Paul Allen, CPA