FDIC Quarterly 38 2015, Volume 9, No. 4

control over the bank. Subchapter S status, however, is 

only a rough proxy for being closely held.

Additional information on organizational form is available in confidential supervisory data. A 1995 study by 

researchers at the Federal Reserve Bank of Kansas City 

and the Office of the Comptroller of the Currency 

used supervisory data to identify closely held banks as 

those where supervisory reports indicated that there 

was a “principal shareholder” who owned more than 

10 percent of voting shares.6 The study found evidence 

that efficient banks tend to have a principal shareholder, managers who hold an ownership stake in the 

bank, or owners who were actively involved in the 

day-to-day management of the bank. The 10 percent 

ownership stake, however, is a blunt measure of the 

ownership structure of a bank. The limited availability 

of more nuanced data on ownership and related agency 

issues has impeded research in this area.

This paper revisits the issue of organizational structure 

using new data from an April 2015 survey of FDIC 

examiners in three supervisory Regions. The examiners answered questions about ownership structure, 

overlap of ownership and management, and management succession at FDIC-supervised banks that were 

examined in 2014 and first quarter 2015. The survey 

was designed to limit the demands on participating 

examiners and eliminate any reporting burden for 

bankers. Although it did not employ a random sample 

of all FDIC-insured banks, the survey provides a fairly 

detailed look at the organizational attributes of more 

than 1,350 FDIC-supervised, state-chartered community banks that operate in the FDIC Kansas City, 

Dallas, or Chicago Regions.

The survey allows us to identify closely held banks 

among these community banks. Additionally, it 

provides information on the overlap of ownership and 

management, and preparedness for management succession, at these banks. By merging the survey results with 

Call Report data, we find that closely held banks have 

not underperformed widely held banks over the past six 

years. In fact, closely held banks in which the manager 

is a member of the ownership group, or is another 

insider, outperform both closely held banks with no 

overlap between ownership and management and 

widely held banks.

6

 Spong, Sullivan, and DeYoung (1995).

Introduction

It is widely recognized that community banks embody 

unique characteristics that distinguish them from other 

banks.1 Community banks are generally smaller in asset 

size than other banks. They tend to focus on traditional 

banking activities, making and holding loans, and funding themselves with core deposits. They hold relatively 

large amounts of equity capital relative to assets. Because 

they do business in a relatively limited geographic area, 

community banks are able to make operational decisions 

locally, frequently based on tacit, personal knowledge 

of their customers and market area, as opposed to relying primarily on models and standardized data. As a 

result, a defining characteristic commonly attributed 

to community banks is that of relationship lending, as 

opposed to a more impersonal, transactional banking 

model. A recent study has incorporated a number of 

these attributes into a community bank definition that 

can be applied consistently over the past 31 years.2

Less extensively studied are the organizational characteristics of community banks, including management and ownership structure. As of December 2014, 

93.2 percent of FDIC-insured community banks 

were organized as stock charters, and the remaining 

6.8 percent were organized as mutuals, where depositors own the bank.3

 As of year-end 2014, 35 percent 

of community banks as defined by the FDIC were 

organized under Subchapter S, which allows banks 

with limited ownership to decrease taxes on earnings.4

Only 7 percent of banks that did not meet the FDIC 

community bank definition were organized under 

Subchapter S.5 This broad measure confirms the general 

understanding that community banks are much more 

likely than noncommunity banks to be “closely held,” 

or controlled by an ownership group with relatively few, 

closely allied members who effectively exercise strategic 

1

 For example, see Hein, Koch, and MacDonald (2005).

2

 FDIC (2012).

3

 Approximately 2 percent of stock banks are owned by mutual bank 

holding companies, so that they are, in effect, mutually owned banks.

4

 Under Subchapter C status, earnings are taxed at the corporate level 

and again at the shareholder level. Subchapter S eliminates the corporate taxation of earnings, reducing the tax burden to shareholders. 

There are several conditions—including having 100 or fewer owners—

that a firm must meet to receive Subchapter S status. See 26 U.S.C. 

§ 1361 for the restrictions on Subchapter S firms.

5

 See FDIC (2012) for the FDIC definition of community bank, which 

presents a functional definition, rather than a fixed-asset-size 

definition.

Financial Performance and Management 

Structure of Small, Closely Held Banks
FDIC Quarterly 39 2015, Volume 9, No. 4

Financial Performance and Management Structure of Small, Closely Held Banks

Concentrated Ownership. One reason a closely held 

ownership structure may be an operational advantage is 

that insider shareholders are likely to view their stake as 

a major, long-term investment rather than as one stock 

in a portfolio. As a result, the owners of a closely held 

bank can be expected to take a longer, more strategic 

perspective than the owners of a bank that must meet 

an earnings target every quarter. To the extent that this 

strategic focus translates into more profitable operational decisions, it could enhance the financial performance of the institution over time. This effect might 

be especially pronounced in the case of family-owned 

banks, for which the planning horizon could span more 

than one generation.8

A second potential advantage of closely held ownership 

is the ability of the bank to address the principal-agent 

problem that can arise between owners and managers. 

A principal-agent problem occurs when the owner 

(principal) of a firm delegates responsibility to the 

manager (agent), but the two do not share the same 

goals.9 Divergence between the goals of owners and 

managers may cause firms to underperform if the manager’s choices do not maximize the value of the firm.

Bank owners can solve this problem by monitoring and 

supervising the manager, but these actions are costly 

in both time and money. In the case of a closely held 

bank, however, owners may have a greater incentive 

to invest in monitoring managers because more of the 

benefits of monitoring accrue to insider owners, rather 

than to external shareholders. Owners of the closely 

held bank are then better equipped to address principalagent problems that may arise from the separation of 

ownership and control.

On the other hand, a bank with a closely held ownership structure may pursue goals other than strict profit 

maximization, so it may be less efficient than a widely 

held bank. In some cases, these goals may reflect a decision to incur noninterest expenses for the benefit of the 

owners, managers, or other affiliated stakeholders to the 

detriment of current earnings (generally referred to as 

expense preference behavior).10 This is not to say that the 

owners’ goals are inconsistent with the long-term interests of the bank, or the mission of a community bank. 

8

 Anderson and Reeb (2003) show that family-owned nonfinancial 

businesses outperform non-family-owned businesses among a sample 

of S&P 500 companies.

9

 For a theoretical discussion of agency problems, see Jensen and 

Meckling (1976).

10 See Edwards (1977). 

In the next section, we briefly discuss what economic 

theory has to say about how ownership structure and 

the overlap between ownership and management might 

affect financial performance. Then we describe the 

survey of FDIC examiners, and compare closely and 

widely held banks as identified in the survey. The final 

section summarizes our findings and suggests areas for 

future research.

Economic Theory: Ownership, Management, and 

Bank Efficiency

Closely held banks frequently differ from widely held 

banks in two important dimensions. The first is the 

degree of concentration of ownership. By definition, 

ownership is more concentrated in a closely held bank 

than in a widely held bank. One individual may own 

the majority of the closely held bank, or ownership may 

be shared among a group affiliated by family or community ties.

Second, concentrated ownership may have implications 

for the management structure of the bank. In a closely 

held bank, day-to-day operational control of the bank 

may reside with a manager who is either a member of 

the ownership group or can otherwise be considered an 

ownership insider.7 In other cases, the bank may be run 

by a hired manager who otherwise has no affiliation 

with the ownership group. Both the concentration of 

ownership and the degree of overlap between ownership 

and control present potential advantages and disadvantages in terms of efficiency (Table 1).

7

 Although it is possible that the manager of a widely held bank can 

also hold an ownership stake or be considered an ownership insider, 

the fact that ownership is not concentrated in a single group limits the 

degree to which ownership and control can overlap at widely held 

banks.

Table 1

How Might Closely Held Ownership 

Influence Operational Efficiency?

Pros Cons

Closely held banks may be 

less beholden to short-term 

earnings pressures.

Closely held banks invest 

more in monitoring managers because they capture 

most of the returns to 

monitoring.

Closely held banks may 

have more trouble raising 

external capital to make 

investments.

Closely held banks may 

pursue goals other than 

profit maximization.

Source: Review of literature on pages 39 and 40.
FDIC Quarterly 40 2015, Volume 9, No. 4

pool from which to recruit qualified managers. When 

the ownership group comprises individuals with close 

family or community ties, those ties may also limit the 

pool of managerial candidates. Even if the owners of 

the closely held bank solve the principal-agent problem 

by finding a qualified manager in the ownership group, 

the bank may face the problem once again when that 

manager retires and the owners must find a qualified 

successor. Additionally, if the retiring manager wants to 

sell a substantial stake in the bank, the bank must also 

find a new owner as well as a new manager.

Results of the FDIC Examiner Survey

A lack of publicly available data has limited the ability to study how ownership structure and managerial 

control affect efficiency and profitability at community 

banks. Most research on bank ownership focuses on 

large banks that are required to file public disclosures. 

For smaller banks without these disclosure requirements, 

researchers have used confidential supervisory data. 

These supervisory data provide some information on the 

ownership structure of community banks, but only about 

the existence of a “principal shareholder.” These data do 

not address the overlap of ownership and management.

This study avoids some of these limitations by using 

the results of a survey of FDIC bank examiners in the 

Chicago, Dallas, and Kansas City supervisory Regions, 

which encompass 21 states (Figure 1). Responses were 

obtained for every bank that had been examined in 

2014 and first quarter 2015. For each bank, the examiners answered a series of simple questions about the 

structure of bank ownership, the overlap between 

ownership and management, and how the bank was 

positioned for management succession. The survey 

responses include more than 1,400 FDIC-supervised 

banks, which represent about 50 percent of all FDICsupervised banks in these Regions. We limit our analysis to the 97 percent of banks covered by the survey 

that meet the FDIC definition of a community bank, 

which leaves us with 1,357 community banks.

The survey is a snapshot of bank ownership of a subset 

of community banks at the end of 2014. The responses 

are not a random sample of community banks nationwide, nor in these three Regions. The survey responses 

cover half of the FDIC-supervised community banks in 

the three Regions, and 33 percent of all FDIC-insured 

community banks. However, the strengths of the survey 

approach include the large number of community banks 

within these Regions, the ability to directly access the 

For example, bank owners may choose to support the 

credit needs of local businesses during difficult times, 

or to invest in the local community through sponsorships or community events. In either case, closely held 

ownership may allow owners to achieve some of their 

financial and strategic goals through means other than 

maximizing profits in the short run.

A second potential disadvantage to closely held ownership is that it may be more difficult for the bank to raise 

capital to make investments that improve the profitability of the bank. Banks raise capital using retained 

earnings or by issuing new ownership shares. Issuing 

shares to new shareholders will dilute the stake of 

the current owners in the bank, so closely held banks 

may be less willing to do this. Closely held banks may 

instead raise new capital from existing owners as “external capital,” and so the amount of capital they can 

raise may be limited. This could prevent the bank from 

making a profitable investment, such as expanding or 

making an acquisition.

Overlap of Ownership and Control. The degree of 

overlap between ownership and managerial control 

can also be an operational advantage or disadvantage 

for a bank (Table 2). Widely held banks, by definition, 

have a substantial separation between ownership and 

control, so they are inherently subject to inefficiencies 

arising from principal-agent problems and must implement potentially costly measures to overcome them. 

In contrast, when the principal owner or an ownership 

group insider exerts day-to-day managerial control over 

a bank, the agency problem is minimized. The manager 

can be expected to act in the interests of the owners 

because the manager is an owner.

The potential downside of significant overlap between 

ownership and control is the limited size of the talent 

Table 2

How Might Overlap of Ownership and Control 

Influence Efficiency?

Pros Cons

The incentives of owners 

and managers are wellaligned and geared toward 

maximizing the long-term 

value of the bank.

Succession planning may 

be more difficult because 

the bank faces a limited 

talent pool.

Succession can involve 

transferring both ownership 

and control, often at the 

same time.

Source: Review of literature on pages 39 and 40.
FDIC Quarterly 41 2015, Volume 9, No. 4

Financial Performance and Management Structure of Small, Closely Held Banks

stake that individually or collectively exerts a deciding influence over the governance of the institution” 

(Table 3). The vast majority of these closely held banks 

are controlled by groups with family or community ties 

(Table 4). In almost all of the closely held community 

banks, members of the primary ownership group are 

directors of the banks.

In a majority of closely held community banks, there 

is also significant overlap between the primary ownership group and the key officer, defined by the survey as 

the person “who effectively runs the bank on a day-today basis, regardless of his/her title.” In 48 percent of 

closely held community banks, the key officer can be 

considered a member of the primary ownership group 

(Table 5). In an additional 10 percent of closely held 

banks, the key officer can be considered an ownership 

group insider, even though he or she is not a primary 

owner. Taken together, these results imply that in 

just under 60 percent of closely held, FDIC-supervised 

community banks covered by the survey, overlap 

between ownership and management helped to limit 

the potential for principal-agent problems that could 

impair operational efficiency.

The survey also included questions on succession 

planning, as this is widely regarded as an important 

recent experience of FDIC examiners, and the fact that 

bank owners or managers are not required to respond to 

survey questions.

The survey results show that among FDIC-supervised 

community banks in the three Regions, closely held 

banks are the norm rather than the exception. Examiners characterized 75 percent of community banks in the 

survey as having an identifiable primary owner, defined 

as “a person or group with a substantial ownership 

Figure 1

Surveyed Banks Represent About Half of all FDIC-Supervised Community Banks

in the Chicago, Dallas, and Kansas City FDIC Regions

Source: April 2015 FDIC Examiner Survey. Community banks are as defined by the FDIC Community Banking Study (2012).

Note: Data are as of December 2014.

34

48% 118

49%

95

53% 42

61%

108

47%

90

44%

26

59%

57

52%

34

58%

72

59%

67

54%

43

46% 33

46%

179

56%

22

47%

63

47%

70

39%

27

53%

16

55%

50

45%

111

49%

Chicago 459 54%

Dallas 393 52%

Kansas City 505 46%

Total 1,357 50%

Number of

Community Banks

FDIC Region Surveyed

Share of 

FDIC-Supervised

Community Banks 

Table 3

Closely Held Banks Make Up Three-Quarters 

of FDIC-Supervised Community Banks 

in Three Regions

Region

Survey 

Responses

Identifiable 

Primary 

Owner Closely Held

Chicago 459 288 63%

Kansas City 505 424 84%

Dallas 393 301 77%

Total 1,357 1,013 75%

Source: April 2015 FDIC Examiner Survey.

Survey Question 1: In your judgment, is there an identifiable primary owner or ownership 

group for this bank? The primary owner or ownership group of the bank is a person or 

group with a substantial ownership stake that individually or collectively exerts a deciding 

influence over the governance of the institution.
FDIC Quarterly 42 2015, Volume 9, No. 4

significant challenge for both closely and widely held 

community banks.

Characteristics, Financial Performance, and 

Capital Formation

Merging the survey data with financial data from bank 

Call Reports permits further analysis of closely and 

widely held community banks. In this section we assess 

the effects of ownership structure and managerial control 

of surveyed banks on their size and geographic characteristics, financial performance, and ability to raise capital.

Characteristics: Among community banks in our 

survey, closely held banks tend to be smaller and 

more rural and agricultural, and have older charters 

than widely held banks. As discussed at the outset, we 

hold certain expectations on how closely held banks 

might compare to widely held banks in our survey, and 

these expectations are generally met (Table 7). For 

example, closely held banks are generally smaller than 

widely held banks; closely held banks had average total 

assets of $264 million at year-end 2014, compared with 

$334 million for widely held banks.

Closely held community banks are also more concentrated in rural areas than widely held banks and are 

more likely to be headquartered in depopulating 

operational concern for community banks.11 Among 

the closely held banks, 50 percent have not identified 

a potential successor for the key officer, compared with 

54 percent of widely held banks (Table 6). In addition, 

38 percent of the closely held banks were not deemed 

to be “well-positioned to recruit qualified management talent from outside the bank,” compared with 

31 percent of widely held banks. Overall, the survey 

results indicate that succession planning remains a 

11 Stewart (2013) discusses the importance of succession planning, 

especially following the financial crisis.

Table 4

Most Closely Held Community Banks Are Built Around Family or Community Ties

Region

Survey Responses 

Indicating Closely Held 

Bank

Ownership Group 

Has Family Ties

Ownership Group 

Has Ties to Community

Members of 

Ownership Group 

Sit on Board

Chicago 288 84% 84% 94%

Kansas City 424 90% 83% 96%

Dallas 301 77% 89% 94%

Total 1,013 85% 85% 95%

Source: April 2015 FDIC Examiner Survey.

Table 5

Ownership and Control Overlap at Most Closely Held Community Banks

Region

Survey Responses 

Indicating Closely Held 

Bank

Key Officer Is Also 

a Member of the Primary 

Ownership Group

Key Officer Is Not a 

Member of Primary 

Ownership Group, but 

Can Be Considered 

an Insider

Total: 

Key Officer Closely 

Affiliated With 

Ownership Group

Chicago 288 44% 7% 51%

Kansas City 424 51% 6% 58%

Dallas 301 45% 17% 62%

Total 1,013 48% 10% 57%

Source: April 2015 FDIC Examiner Survey.

Table 6

Management Succession Is an Issue for Many 

Closely Held and Widely Held Community Banks

Region

Survey 

Responses

Bank Has 

Identified 

a Viable 

Successor

Bank Is WellPositioned to 

Recruit 

Qualified 

Management 

From Outside

Chicago 288 41% 56%

Kansas City 424 57% 67%

Dallas 301 50% 62%

Total Closely Held 1,013 50% 62%

Total Widely Held 344 46% 69%

Source: April 2015 FDIC Examiner Survey.
FDIC Quarterly 43 2015, Volume 9, No. 4

Financial Performance and Management Structure of Small, Closely Held Banks

Finally, closely held community banks in the survey 

tended to have older charters than did widely held 

banks. Both types of institutions have a substantial 

proportion of charters that are more than 100 years 

old—43 percent for closely held community banks and 

38 percent for widely held community banks. Widely 

held banks, however, are more than three times more 

likely (24 percent) than closely held banks (7 percent) 

to have a charter 15 years old or younger.

Financial performance: Among community banks in 

our survey, closely held banks generally outperformed 

widely held banks in recent years when they had an 

overlap with management. Based on our prior discussion of the economic theory on ownership, management, and bank efficiency, we wanted to understand 

how ownership structure and the overlap of ownership 

and control affect financial performance. To capture 

these differences, we segmented the banks into three 

groups: closely held banks where the key officer is also 

a member of the primary ownership group (denoted as 

“Overlap” in Charts 1 and 2, Tables 2 and 5, and in 

Table A1 in the Appendix); closely held banks where 

counties. Thirty-six percent of closely held community 

banks were headquartered in rural counties, compared 

with 21 percent of widely held institutions. Twentyfour percent of the surveyed closely held community 

banks were headquartered in depopulating rural counties, compared with only 10 percent of widely held 

banks. Banks headquartered in depopulating areas face 

challenges of declining customer bases and, in some 

instances, difficulty in attracting qualified management.12

Closely held community banks in the survey were also 

nearly twice as likely as widely held banks to specialize in agricultural lending.13 These characteristics are 

consistent with the higher propensity of closely held 

banks to be headquartered in rural counties. By contrast, 

the widely held community banks in the survey, which 

were more heavily concentrated in metropolitan or 

micropolitan counties, were more likely to specialize in 

mortgage lending or multiple lending areas.

12 Anderlik and Cofer (2014).

13 Lending specialty definitions are from Chapter 5 of FDIC (2012).

Table 7

Closely Held and Widely Held Community Banks Differ on Many Characteristics

Characteristic Closely Held Banks Widely Held Banks

Assets

Average Asset Size $264 million $334 million

Average Equity Capital as Percentage of Assets 10.7% 11.0%

Geography

Headquartered in Metropolitan Countya 46% 57%

Headquartered in Micropolitan County 18% 22%

Headquartered in Rural County 36% 21%

Headquartered in Depopulating Rural Countyb 24% 10%

Lending Specialty

Agricultural Lending Specialtyc 25% 13%

Commercial and Industrial Lending Specialty 2% 1%

Commercial Real Estate Lending Specialty 20% 23%

Mortgage Lending Specialty 7% 18%

Multiple Lending Specialties 12% 19%

No Lending Specialty (Diversified) 32% 24%

Other Consumer Lending Specialty 1% 1%

Age

Charter 15 Years Old or Younger 7% 24%

Charter Older Than 100 Years 43% 38%

Source: FDIC Data and April 2015 Examiner Survey.

Notes: All figures are as of December 2014.

a. This study follows the designations established by the U.S. Office of Management and Budget for each of the 3,221 U.S. counties and county equivalents as either metropolitan 

(1,236 counties that are economically linked to 1 of the 388 U.S. Metropolitan Statistical Areas), micropolitan (646 counties centered on an urban core with a population of between 10,000 

and 50,000 people), or rural (counties not located in metropolitan or micropolitan areas).

b. “Depopulating Rural County” refers to a county that lost population between the 1980 census and 2010 census. See Anderlik and Cofer (2014).

c. Community bank lending specialty groups as defined by Chapter 5 of the FDIC Community Banking Study (2012).
FDIC Quarterly 44 2015, Volume 9, No. 4

of closely held banks that have no overlap, as well as 

those of widely held banks (Chart 2).

Looking at the components of the efficiency ratio, 

closely held banks with overlap of management and 

ownership reported higher salary expense as a percentage of average assets in each of the past six years. 

Higher levels of noninterest income and much higher 

loan yields, however, more than made up for the salary 

expense disadvantage.

Because closely held banks and widely held banks differ 

in many characteristics, it is important to attempt to 

hold these other characteristics constant when comparing performance across these groups. Accordingly, we 

the manager is an outsider (“No Overlap”); and widely 

held banks, where by definition there is no primary 

ownership group.

The first comparison we made is of the pretax return on 

assets. The left side of Chart 1 compares pretax return 

on assets for closely held and widely held community 

banks in our survey from 2009 to 2014 and shows that 

the closely held banks consistently outperformed widely 

held banks over this period. When we split closely held 

banks into those that have ownership–management 

overlap and those that do not (right side of Chart 1), 

however, we found that the closely held banks where 

ownership and management overlap clearly outperformed both widely held banks and the closely held 

banks where ownership and management did not overlap. The average annual performance advantage for 

closely held community banks with management overlap was 21 basis points higher compared with closely 

held banks with no overlap, and 30 basis points higher 

compared with widely held community banks. Although 

these gaps appear to have narrowed over the past three 

years, they were still more than 20 basis points in 2014.

Another comparison that focuses more squarely on 

operational efficiency involves the efficiency ratio, or 

the ratio of noninterest expenses to net operating 

revenue. This measure represents the expense incurred 

by the bank to generate $1 of revenue. Similar to the 

profitability comparisons, over the most recent six-year 

period, closely held community banks in our survey 

that have overlap between ownership and management 

consistently reported efficiency ratios better than those 

Closely Held Community Banks Where Ownership and Managerial Control Overlap

Have Consistently Reported Higher Protability

Pretax Return on Assets

Percentage

Widely Held

Closely Held – Overlap

Closely Held – No Overlap

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

2009 2010 2011 2012 2013 2014

Widely Held

Closely Held

Source: FDIC Analysis of Call Report data on 1,357 FDIC-supervised community banks headquartered in the FDIC Kansas City, Dallas, and Chicago Regions that were identified in the April 2015 

FDIC Examiner Survey as closely held or widely held.

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

2009 2010 2011 2012 2013 2014

Chart 1

Closely Held Community Banks Where Ownership and

Managerial Control Overlap Have Consistently

Reported Higher Protability

Efficiency Ratio of Community Banks by Ownership Type

Widely Held

Closely Held – Overlap

Closely Held – No Overlap

62%

64%

66%

68%

70%

72%

2009 2010 2011 2012 2013 2014

Efficiency Ratio = Noninterest Expenses

Net Interest Income + Noninterest Income

Source: FDIC Analysis of Call Report data on 1,357 FDIC-supervised community banks 

headquartered in the FDIC Kansas City, Dallas, and Chicago Regions that were identified 

in the April 2015 FDIC Examiner Survey as closely held or widely held.

Chart 2
FDIC Quarterly 45 2015, Volume 9, No. 4

Financial Performance and Management Structure of Small, Closely Held Banks

study period.14 In all but one of the six years studied, 

widely held community banks raised external capital 

more frequently than closely held banks, and the gap 

was widest in 2014 (Chart 4). It is important to note 

here that external capital may also include capital from 

existing owners or insiders and, for community banks, 

is more likely to take place through a private placement 

than through a market offering. On balance, although 

the closely held banks in our sample relied more heavily 

on retained earnings to increase their capital, and also 

raised external capital less frequently than widely held 

banks, there is little evidence that closely held community banks were at a decided disadvantage in terms of 

access to external capital.

Summary and Conclusions

Community banks have been defined in a number of 

studies as being generally small institutions that rely on 

core deposit funding and operate as relationship lenders within a limited geographic area. Less attention has 

been paid in the literature to the ownership structure 

of community banks and how it relates to day-to-day 

operational control and to long-term management 

succession.

14 Our time period includes three years in which the federal government 

recapitalized banks through the Troubled Asset Relief Program (TARP) 

and the Small Business Lending Fund (SBLF). These programs were 

more heavily used by widely held banks than by closely held banks. 

TARP was used in 2009 and 2010, and in those years, 36 percent of 

widely held banks surveyed that raised capital and 21 percent of 

closely held banks surveyed that raised capital received TARP funds. 

In 2011, the year the SBLF disbursed funds, 31 percent of widely held 

banks surveyed that raised capital received SBLF funds, compared to 

24 percent for closely held banks surveyed that raised capital.

performed multiple regression analysis of the performance of the surveyed banks during the five years from 

2010 to 2014 to determine the relative contribution of 

the different characteristics to financial performance. 

The appendix presents the results of the analysis. After 

controlling for the other differences between the banks, 

we find that being closely held has not had a statistically 

significant effect on financial performance. Having overlap between owner and management, however, has had 

a significant, positive effect on financial performance. 

This effect provides evidence that some of the benefit 

of a closely held organizational structure is the opportunity to resolve principal-agent problems by aligning the 

interests of managers with the interests of owners.

Capital formation: Among community banks in our 

survey, closely held banks raise external capital less 

often than their widely held peers, but they do not 

appear to be disadvantaged in their access to capital 

sources. One potential concern about the closely held 

organizational structure is whether it limits the bank’s 

access to external sources of capital, thereby limiting 

the ability to respond to adverse shocks or to pursue 

strategic opportunities. As expected, the closely held 

banks surveyed have tended to rely more heavily on 

retained earnings to increase equity capital and to raise 

less capital from external sources than do widely held 

banks (Chart 3). Between 2009 and 2014, the closely 

held banks obtained 60 percent of gross additions 

to capital via retained earnings, compared with just 

48 percent for the widely held community banks.

Moreover, we find that the widely held community 

banks surveyed raised capital from external sources 

somewhat more often than closely held banks over the 

Closely Held Community Banks Rely More on

Retained Earnings as a Source of Capital

48%

60%

52%

40%

0% 20% 40% 60% 80% 100%

Widely 

Held

Closely

Held

Retained Earnings External Capital

Percentage of Gross Capital Raised by Source, 2009 to 2014

Source: FDIC Analysis of Call Report data on 1,357 FDIC-supervised community banks 

headquartered in the FDIC Kansas City, Dallas, and Chicago Regions that were identified in 

the April 2015 FDIC Examiner Survey as closely held or widely held.

Note: Excludes institutions in first year of existence.

Chart 3

There Is Little Evidence That Closely Held

Community Banks Were at a Decided Disadvantage

in Access to Capital

23.5

15.2

11.3

9.9 9.3

12.2

19.3

14.6

11.9

8.1 7.9

6.5

0

5

10

15

20

25

2009 2010 2011 2012 2013 2014

Widely Held

Closely Held

Source: FDIC Analysis of Call Report data on 1,357 FDIC-supervised community banks 

headquartered in the FDIC Kansas City, Dallas, and Chicago Regions that were identified 

in the April 2015 FDIC Examiner Survey as closely held or widely held.

Note: Excludes institutions in first year of existence. 

Percentage of Surveyed Community Banks Raising Capital, 2009 to 2014

Chart 4
FDIC Quarterly 46 2015, Volume 9, No. 4

These favorable comparisons between closely held and 

widely held community banks suggest that the closely 

held organizational form is by no means an impediment to performance, and may well be one of the 

keys to the success of closely held banks. Closely held 

community banks in which ownership and management largely overlap appear to exhibit advantages over 

other community banks even after accounting for other 

factors that affect performance. Nonetheless, this recipe 

for success—relying on managers who are insiders to the 

ownership group—may prove difficult for these institutions to replicate going forward as they address the 

issue of management succession. Additional research 

would be useful to better understand how community 

banks address management succession, and how their 

approach to this issue can affect their financial performance and their ability to remain independent.

Authors: John M. Anderlik, Assistant Director

Division of Insurance and Research

Richard A. Brown, Associate Director

Division of Insurance and Research

Kathryn L. Fritzdixon, Financial Economist

Division of Insurance and Research

We thank Richard Cofer, Martin Cooper, Chasity Dschaak, 

Jessica Kaemingk, James LaPierre, and Rich Speigle for their 

valuable contributions in helping to design and execute the 

examiner survey. We thank Clayton Boyce and Eric 

Breitenstein for a wide range of analytical and editorial 

assistance. Any remaining errors are the responsibility of 

the authors.

References

Anderlik, John, and Richard Cofer. 2014. Long-Term 

Trends in Rural Depopulation and Their Implications for 

Community Banks. FDIC Quarterly 8, no. 2:44–59.

Anderson, Ronald, and David Reeb. 2003. Founding-Family 

Ownership and Firm Performance: Evidence from the S&P 

500. Journal of Finance 58, no. 3:1301–28.

Edwards, Franklin R. 1977. Managerial Objectives in 

Regulated Industries: Expense-Preference Behavior in 

Banking. Journal of Political Economy 85, no. 1:147–61.

Federal Deposit Insurance Corporation (FDIC). 2012. FDIC 

Community Banking Study. FDIC.

Hein, Scott, Timothy Koch, and Scott MacDonald. 2005. On 

the Uniqueness of Community Banks. Federal Reserve Bank 

of Atlanta Economic Review First Quarter:15–36.

Jensen, Michael, and William Meckling. 1976. Theory of the 

Firm: Managerial Behavior, Agency Costs and Ownership 

Structure. Journal of Financial Economics 3, no. 4:305–60.

Spong, Kenneth, Richard Sullivan, and Robert DeYoung. 

1995. What Makes a Bank Efficient? A Look at Financial 

This paper addresses the relative lack of data describing these attributes by introducing new survey data 

collected from FDIC examiners of community banks 

headquartered in 21 states in the central FDIC supervisory Regions of the United States. We find that threequarters of FDIC-supervised community banks in these 

Regions are defined by a closely held organizational form, 

where a primary ownership group exerts a deciding influence over the governance of the institution. The vast 

majority of these closely held institutions are owned by 

groups that share family or community ties, and a majority of them also exhibit a substantial overlap between the 

ownership group and the key officer who effectively runs 

the bank. Both closely held and widely held community 

banks in the survey appear to face significant challenges 

when it comes to management succession, with only 

half of closely held banks reportedly having identified a 

successor to the key officer at the time of the survey.

Economic theory suggests that the closely held organizational form and overlap between ownership and 

management may each offer potential advantages 

and disadvantages for community bank performance. 

Managers of closely held banks may benefit from the 

ability to make decisions according to a longer time 

horizon than widely held banks, and their owners 

may be able to capture more of the returns than can 

be earned by monitoring the performance of bank 

managers. Closely held community banks may choose 

to pursue goals other than strict profit maximization, 

however, and may have limited access to external 

capital. Although closely held banks may be able to 

resolve agency conflicts with managers by recruiting 

those managers from within the ranks of ownership, 

this solution constrains the size of the talent pool. Even 

when a closely held bank successfully aligns the longterm interests of owners and managers, it must do so all 

over again when it searches for qualified successors to 

its current management team.

Comparisons of financial performance and efficiency 

indicate that the closely held community banks surveyed 

consistently outperformed widely held community banks 

in recent years. The highest performance has been found 

among closely held community banks where there is 

substantial overlap between ownership and management, and therefore the potential for agency conflicts 

is minimized. Although closely held banks surveyed 

relied more on retained earnings to raise capital than 

did widely held banks, and raised external capital less 

frequently, there is little evidence that closely held 

community banks were at a decided disadvantage to 

widely held banks in terms of access to external capital.
FDIC Quarterly 47 2015, Volume 9, No. 4

Financial Performance and Management Structure of Small, Closely Held Banks

Characteristics and Bank Management and Ownership 

Structure. Financial Industry Perspectives December:1–19.

Stewart, Jackie. 2013. Community Banks Are Falling Behind 

in Succession Planning. American Banker, March 26. 

http://www.americanbanker.com/issues/178_59/communitybanks-are-falling-behind-in-succession-planning-1057825-1.

html. Accessed December 2, 2015.

Appendix: 

Regression Analysis of Pretax Return on Assets

Closely and widely held community banks differ in 

several characteristics that affect financial performance. 

To ensure that our comparisons are not simply based 

on these other characteristics, we perform multiple 

regression analysis of pretax return on assets comparing 

whether a bank is closely held, whether it has overlap 

of ownership and control, and a number of control 

characteristics. Regression analysis allows us to compare 

the performance of closely and widely held banks that 

are otherwise similar.

Our regression takes the form of

ROAit = β0 + β1CloselyHeldi + β2Overlapi + 

β3 Ageit + β4 Assetsit + β5 Metroi + β6BusinessLineit + 

β7 MarketPower + γ  State + δ Year + εit,

where ROAit is pretax return on assets; Closely Held is 

an indicator variable equal to one if the bank is closely 

held and zero otherwise; Overlap is an indicator variable equal to one if there is overlap between ownership 

and management; Age is the age of the bank; Assets

is the size of the bank measured in total assets; Metro

is a set of indicator variables for whether the bank is 

headquartered in a county in a metropolitan statistical area, micropolitan statistical area, or rural area; and 

BusinessLine is a set of indicator variables for the bank’s 

business line. The panel regressions also include state 

and year fixed effects. Standard errors are clustered at 

the state level.

The results of the regressions are presented in Table A1. 

The data are from the December Call Report for each 

surveyed community bank for the years 2010 through 

2014. The data show that closely held banks, on average, have not underperformed widely held banks, even 

when controlling for other bank characteristics that 

affect profitability. The coefficient on being closely held 

is small and statistically insignificant. Once we control 

for the other differences between closely and widely 

held banks, there does not appear to be a difference 

in their financial performance. The coefficient on the 

overlap between ownership and management, however, 

is positive and statistically significant, which suggests 

that having an owner serve as day-to-day manager of 

the bank is an effective way to mitigate the principalagent problem in closely held banks.

Table A1

Regression Analysis Shows Closely Held 

Community Banks With Overlap of 

Managers and Owners Outperform 

Other Community Banks

Pretax Return on 

Assets

Mean Pretax Return on Assets 0.083

Closely Held = 1 –0.0234

(0.0690)

Overlap = 1 0.117**

(0.0427)

Age 0.000125

(0.0011)

Total Assets ($ million) 0.314***

(0.0401)

Headquarters in Metropolitan Area –0.260***

(0.0518)

Headquarters in Micropolitan Area 0.00821

(0.0767)

Market Power 0.0000516**

(0.0000)

Agricultural Specialization 0.409***

(0.1190)

Commercial and Industrial 

Specialization

0.172

(0.1970)

Commercial Real Estate Specialization –0.046

(0.1030)

Mortgage Specialization 0.200*

(0.1110)

Multispecialty 0.082

(0.0917)

No Specialty 1.039***

(0.3270)

State Fixed Effects Yes

Year Fixed Effects Yes

Observations 6,784

Adjusted R-Squared 0.131

Source: FDIC Data and April 2015 Examiner Survey.

Notes: This table presents regression results for pretax return on assets on whether the 

bank is closely held, whether there is overlap in management and ownership, and a set of 

controls. Standard errors, clustered at the state level, are in parentheses below the 

coefficients.

* p < 0.10

** p < 0.05

*** p < 0.01.