FDIC Quarterly 27 2013, Volume 7, No. 4

U.S. counties—almost 20 percent of the total—in 2011 

where the only FDIC-insured banking facilities in operation were those run by community banks.

The analysis of comparative financial performance in 

the Study also highlighted a combination of challenges 

and success stories for community banks. As measured 

by pretax return on assets (ROA), noncommunity 

banks outperformed community banks by an average of 

38 basis points per year in the 15 years leading up to the 

financial crisis that began in 2007. While community 

banks generally held the advantage in terms of provisions for loan losses, overhead expenses, and net interest income, noncommunity banks were much more 

successful at deriving noninterest income from offbalance-sheet activities. Moreover, the advantage that 

community banks have traditionally enjoyed in generating net interest income, which accounted for 81 

percent of their total revenue stream in 2005, has 

waned over time. The Study showed that more than 70 

percent of the deterioration in the community bank 

efficiency ratio between 1998 and 2011 could be attributed to a squeeze on net interest income, which has 

intensified during the zero-interest-rate period that 

began in 2008.3

The Study failed to find systematic evidence that 

community banks are predisposed to be less profitable than larger, noncommunity institutions. Among 

charters that operated continuously between 1984 

and 2011, community banks were actually a bit more 

profitable on average than were noncommunity banks. 

Analysis of average costs showed that economies of 

scale among community banks—where they existed at 

all—were mostly realized at a relatively modest asset 

size of $100 million to $300 million.4 More than 60 

percent of community banks in 2011 operated in one 

of three lending specialty groups—agricultural lending, 

mortgage lending, or diversified nonspecialty lending—

3

 The efficiency ratio compares the level of overhead costs (total 

noninterest expense) to net operating revenues (the sum of net interest income and total noninterest income). A higher efficiency ratio 

actually suggests inefficiency, because it indicates that the bank is less 

productive in converting expenditures into revenue.

4

 Stefan Jacewitz and Paul Kupiec, “Community Bank Efficiency 

and Economies of Scale” (Federal Deposit Insurance Corporation, 

December 2012), http://www.fdic.gov/regulations/resources/cbi/report/

cbi-eff.pdf.

Introduction

In December 2012, the FDIC published the FDIC 

Community Banking Study, a comprehensive report on 

trends in U.S. community banking over the 27-year 

period from year-end 1984 through 2011.1 Developing a 

new research definition of community banks, and 

addressing topics such as structural change, geography, 

financial performance, lending specialties, and capital 

formation, the Study showed that community banks 

continue to play a central role in the U.S. economy and 

in local communities across the country. At the same 

time, the Study highlighted a number of important 

long-term trends that have dramatically reshaped the 

community banking sector over time.

One such trend is consolidation: The total number of 

federally insured bank and thrift charters declined by 59 

percent between 1984 and 2011 to 7,357. This decline 

was driven not only by the failures that occurred in two 

major banking crises, but also by the voluntary mergers 

and intra-company consolidations that followed the 

dismantling of geographic restrictions in banking some 

two decades ago. All of the net consolidation that took 

place during this period was accounted for by the disappearance of the smallest banks—those with assets less 

than $100 million. The number of FDIC-insured institutions with assets between $100 million and $1 

billion—almost all of which met the FDIC’s research 

definition of a community bank—actually increased 

over this period.

This consolidation had little net effect on the relative 

number of community bank organizations and charters, 

both of which continued to exceed 90 percent of the 

total in 2011. Nevertheless, it led to a two-thirds 

decline in the share of industry assets held by community banks, which was just 14 percent by year-end 2011. 

Even so, at the end of the period, community banks 

continued to hold 46 percent of the industry’s small 

loans to U.S. farms and businesses as well as the majority of banking deposits at bank branches located in rural 

and micropolitan counties.2 The Study identified 627 

1 FDIC Community Banking Study, 2012, http://www.fdic.gov/

regulations/resources/cbi/study.html.

2

 Micropolitan counties are those centered on an urban core with a 

population between 10,000 and 50,000 people. There were 694 micropolitan counties in the United States in 2010, out of a total of 3,238.

Feature Article:

Community Bank Developments in 2012
FDIC Quarterly 28 2013, Volume 7, No. 4

updated for this report using year-end 2012 data. Designating at the level of the bank holding company, the 

definition is applied in two steps: (1) excluding banks 

that do not engage in certain basic banking activities, 

and (2) including banks that meet minimum requirements for lending and core deposit funding and that 

conform to limits on the number and size of their banking offices and the number of states and large metropolitan areas in which they operate.6

 The requirements 

and limits of item (2) are waived for those institutions 

with assets below a certain time-indexed size threshold 

($1.12 billion in 2012), which are automatically considered to be community banks.7

Although size remains one factor in our definition of a 

community bank, it is not the only factor, as has been 

the case in much of the previous research on this topic. 

Moreover, where size-based metrics are employed in the 

FDIC definition, they have been indexed over time to 

adjust for increases in banking industry assets as well as 

increases in the nominal level of economic activity.8

Establishing the definition in this way allows for meaningful distinctions between community and noncommunity banks across a 28-year period. It is also worth 

noting that the FDIC’s community bank designations 

for previous years have been updated to reflect annual 

revisions to historical data; however, the changes to 

historical designations as a result of data revisions were 

relatively inconsequential. For example, of the 6,721 

banking organizations reporting at year-end 2011, only 

one had its community bank designation changed as a 

result of revisions to historical data during 2012.

Table 1 depicts changes in the designations of community and noncommunity institutions between 2011 and 

2012. The number of community bank charters fell by 

255 (3.8 percent) during the year, while the number of 

noncommunity bank charters fell by 19 (3.4 percent). 

The following section explores structural change during 

2012 in more detail.

6

 For a complete description of the community bank definition 

developed for the FDIC Community Banking Study, see Appendix A of 

the Study: http://www.fdic.gov/regulations/resources/cbi/report/

CBSI-A.pdf.

7

 Analysis of these institutions shows that 92 percent of them would 

have conformed to all of the requirements for inclusion as a community bank at year-end 2012 even if they had not been automatically 

designated as community banks because of their size.

8

 Between 1984 and 2012, both total assets of FDIC-insured institutions and nominal U.S. GDP rose by an approximate factor of four. 

that generally enjoyed high and stable earnings and low 

rates of failure during the study period. It was this type 

of steady earnings performance that enabled community banks to generate almost half of all the new equity 

capital they added during the study period through 

retained earnings.

As instructive as these long-term results are, they 

merely set the stage for a more pressing question: How 

will community banks fare in the post-crisis 

environment?

This paper seeks to answer this question by extending 

the results of the Study. It applies the community bank 

definition from the Study to year-end 2012 data, and 

recapitulates key elements of the analysis for 2012. 

Consistent with the previous Study, it focuses on recent 

trends in industry structure, balance sheet composition, 

geography, earnings, and capital formation.

Trends observed in 2012 suggest a positive outlook for 

the community banking sector. Overall, FDIC-insured 

institutions have seen problem loans decline from the 

peak levels of 2009. Net income has recently exceeded 

pre-crisis levels even if profitability—as measured by 

ROA—has not.5 The Study and other FDIC analyses 

show that smaller institutions have tended to lag larger 

ones in this respect, owing in part to their greater 

dependence on loans secured by real estate. Community 

banks continue to hold a majority of deposits in rural 

and micropolitan areas, and remain an important source 

of credit in many sectors. Community bank earnings 

improved substantially in 2012 primarily because of 

lower loss provisions and higher noninterest income. 

Higher earnings, in turn, led to greater capital formation through retained earnings, which has traditionally 

been the most consistent source of new capital for 

community banks. While the recovery of the community banking sector remains incomplete, and in some 

respects continues to lag that of noncommunity banks, 

2012 represented the best year for community banks 

since the onset of the financial crisis in 2007.

Defining the Community Bank

The FDIC Community Banking Study was conducted 

using a definition of a community bank that emphasized both traditional banking activities and a limited 

geographic scope of operations. This definition has been 

5

 Industry net income peaked at $215 billion in 2006. Industry net 

income was $201 billion in 2012, the second-highest level on record. 
FDIC Quarterly 29 2013, Volume 7, No. 4

Community Bank Developments in 2012

failures, intercompany mergers, intracompany consolidations, voluntary liquidations, and new charters.

The number of bank failures continued to fall in 2012, 

but was still elevated compared with pre-crisis levels (see 

Chart 2). A total of 51 institutions, all of which were 

community banks, failed in 2012. This is down from 88 

community bank failures in 2011, and down from a 

cyclical peak of 144 failures in 2010. The community 

bank failure rate, defined as the number of community 

Structural Change

The banking industry continued to experience a net 

consolidation of charters during 2012, but at a slower 

pace than that experienced in 2010 or 2011. The total 

number of federally insured banks and thrifts fell by 274 

(3.7 percent) during the year (see Chart 1), compared 

with a 4.4 percent decline in 2010 and a 3.9 percent 

decline in 2011. Meanwhile, the number of community 

bank charters fell by 255 (3.8 percent) in 2012, 

compared with 3.2 percent in 2010 and 3.1 percent 

in 2011.

Although the pace of industry consolidation has slowed 

for two consecutive years, it continues at a rate that is 

slightly higher than the historical average. Between 

1984 and 2012, the number of insured institutions fell 

at an average annual rate of 3.3 percent (Chart 1), 

while the number of community bank charters fell at an 

average rate of 3.1 percent. Net consolidation of banking charters has taken place in every year since 1985, 

but slowed somewhat around 2000 before increasing 

again during the recent financial crisis. As the effects of 

the crisis recede, it remains to be seen whether charter 

consolidation will continue at an above-average pace or 

slow to the historically low rates experienced in the precrisis years. The answer depends on future trends in the 

various components of charter consolidation, namely 

Table 1

Designation of Community Banking Organizations Using FDIC Research Criteria

6,141

organizations designated as

“community institutions” out of

6,501 banking organizations

6,544 community bank charters

out of 7,083 total FDIC-insured

banking charters

83

small

organizations

excluded

$20.1 billion

in assets

27

large

organizations

excluded

$4.3 trillion

in assets

250 organizations

$8.1 trillion in assets

297 organizations

$655 billion in assets

5,844

organizations

$1.4 trillion

in assets

83

small

organizations

excluded

$18.9 billion

in assets

32

large

organizations

excluded

$4.2 trillion

in assets

249 organizations

$7.7 trillion in assets

314 organizations

$630 billion in assets

6,043

organizations

$1.3 trillion

 in assets

2011 2012

2011

Asset Size

Threshold:

$1.06 billion

2012

Asset Size

Threshold:

$1.12 billion

6,357

organizations designated as

“community institutions”out of

6,721 banking organizations

6,799 community bank charters

out of 7,357 total FDIC-insured

banking charters

Size

Source: FDIC.

Chart 1

The Banking Industry Experienced Net Consolidation

in Every Year Since 1985

-3.7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

1985–2012 Average:

-3.3%

Source: FDIC.

Year-Over-Year Percent Change in the Number of Bank and Thrift Charters
FDIC Quarterly 30 2013, Volume 7, No. 4

After slowing in the post-crisis years, voluntary closings 

picked up again in 2011 and 2012.10 Chart 5 and 

Chart 6 show that the number of voluntary charter 

closings among community banks, which averaged 243 

per year between 2003 and 2008, reached a low of 102 

in 2010. A total of 188 community bank charters closed 

through voluntary deals in 2012, up from 148 in 2011. 

Of these 188 closings, 142 were intercompany mergers, 

35 were intracompany consolidations, and 11 were 

voluntary liquidations.

10 Transactions in which a charter exits the industry without failing are 

referred to as voluntary charter consolidations. Voluntary charter 

consolidations comprise intercompany mergers, intracompany charter 

consolidations, and voluntary liquidations. The number of voluntary 

liquidations is typically small, averaging seven per year since 1985.

bank failures as a percent of all community banks at the 

end of the previous year, fell to 0.75 percent in 2012 

from 1.25 percent in 2011 (see Chart 3).

As has been the case throughout much of the post-crisis 

period, most of the community banks that failed in 

2012 were commercial real estate (CRE) lending 

specialists.9 A total of 33 CRE specialist community 

banks failed during the year, representing 64 percent of 

all community bank failures (see Chart 4). This is down 

from 79 CRE specialist community bank failures, 90 

percent of total community bank failures, in 2011. The 

high rate of failure among community bank CRE 

specialists since 2008 illustrates both the shift of 

community banks toward CRE lending after 2000 and 

the vulnerability of this line of business to the downturn in U.S. real estate prices associated with the crisis. 

CRE prices as measured by the Moody’s/Real Capital 

Analytics Commercial Property Price Index bottomed 

out in 2009, while residential home prices, as measured 

by the Standard and Poor’s/Case-Shiller U.S. National 

Home Price Index, hit a cyclical low in 2012. Through 

the end of 2012, FDIC-insured institutions had charged 

off $33 billion in CRE loans, and failures had begun to 

moderate. These trends suggest that bank failures will 

contribute less to the pace of industry consolidation in 

the near future.

9

 CRE loans are composed of loans secured by multifamily residential 

properties, construction and development loans, and loans secured by 

nonfarm nonresidential properties. CRE lending specialists are institutions that either hold construction and development loans greater than 

10 percent of assets or hold total CRE loans greater than 30 percent of 

assets, and that do not meet any of the other single-specialty lender 

criteria. Detailed community bank lending specialty group definitions 

are available on page 5-3 of the FDIC Community Banking Study.

Chart 2

The Number of Bank Failures Continues to Decline

0

20

40

60

80

100

120

140

160

180

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Community Banks

Noncommunity Banks

Annual Number of Bank Failures

Source: FDIC.

Chart 3

Failure Rates Have Moderated 

Failed Institutions as a Percent of All Institutions Reporting at the Prior Year-End

0%

1%

2%

3%

4%

5%

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

Community Banks

Noncommunity Banks

Source: FDIC.

0.75%

0.00%

Chart 4

CRE Specialists Accounted for the Majority of

Community Bank Failures in Recent Years

0%

20%

40%

60%

80%

100%

2008 2009 2010 2011 2012

No 

Specialty

Agricultural 

Specialists

C&I 

Specialists

CRE 

Specialists

MultiSpecialists

Mortgage

Specialists

Source: FDIC. Lending specialty groups are defined on page 5-3 of the FDIC Community 

Banking Study.

Note: No community bank consumer lending specialists have failed since 2008.

Percent of Community Bank Failures
FDIC Quarterly 31 2013, Volume 7, No. 4

Community Bank Developments in 2012

absence of any new banking charters. Chart 7 shows 

how chartering activity—always cyclical in nature—

declined markedly after the onset of the crisis, and 

ceased altogether in 2012.11 A number of factors may 

have contributed to the steep drop-off in new charters 

in this cycle, including the availability to investors of 

hundreds of failed bank charters and the ongoing low 

interest rate environment that has squeezed net interest 

margins and profitability at many community banks 

(see Comparative Financial Performance: Community 

Versus Noncommunity Banks below).

To the extent that temporary factors have been important in the cyclical decline in new chartering, it seems 

likely that chartering activity will pick back up once 

these factors begin to abate. As of November 2013, 

there were two pending applications for deposit insurance by new community banks. In addition, the credit 

quality of bank balance sheets continued to improve, as 

evidenced by the decline in noncurrent loan rates for 

virtually every loan type in 2012. As the number of 

community bank failures has fallen by 65 percent from 

its peak in 2010, the availability of charters through 

failed bank acquisitions has been reduced.

For now, signs point to slowing in the pace of consolidation among community banks and the banking industry 

as a whole. Table 2 provides a summary of the factors 

contributing to net consolidation during 2012. As 

described above, failures are on the way down, voluntary 

deals are on the way up, and there appears to be greater 

interest in new banking charters. While gradual charter 

11 Two of the new charters issued in 2011 were “shelf charters,” used 

at their inception to acquire failed banks. 

Chart 5 shows that the number of voluntary deals 

among community banks in 2012 was lower than in any 

of the pre-crisis years between 2003 and 2008. During 

those years, a vibrant market for voluntary mergers—

many transacted at a premium to book value—was 

viewed by many as a sign of the high value of the 

community bank franchise. Chart 6 shows that the rate 

of voluntary closure among community banks has 

always been lower than that among noncommunity 

banks, and this trend continued in 2012. Community 

banks exited through this route at less than half the rate 

of noncommunity banks in 2012. Chart 6 also shows 

that the share of community banks exiting through 

voluntary closure recovered in 2010 and 2011 to a level 

more consistent with pre-crisis norms.

Perhaps the most important factor contributing to the 

net consolidation of the industry in 2012 was the 

Chart 5

The Number of Voluntary Community Bank Closings

Increased in 2012

0

50

100

150

200

250

300

350

400

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Community Banks

Noncommunity Banks

Annual Number of Voluntary Closings

Source: FDIC. Voluntary closings include intracompany consolidations, intercompany 

mergers, and voluntary liquidations.

Chart 6

The Voluntary Closure Rate Among Community Banks

Rose in 2012

0%

5%

10%

15%

20%

25%

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

Community Banks

Noncommunity Banks

Source: FDIC. Voluntary closings include intracompany consolidations, intercompany 

mergers, and voluntary liquidations.

Voluntarily Closed Institutions as a Percent of All Institutions Reporting at the Prior Year-End

2.8%

6.3%

Chart 7

No New Institutions Were Chartered in 2012

0

50

100

150

200

250

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: FDIC.

Annual Number of New Charters

Community Banks

Noncommunity Banks
FDIC Quarterly 32 2013, Volume 7, No. 4

offs tend to reduce outstanding loan balances, but high 

volumes of noncurrent loans tend to discourage banks 

from extending new credit while they are busy remediating problem loans.

The magnitude of the boom and subsequent bust in 

community bank CRE balances can be seen by comparing their total CRE loan growth between 2002 and 

2008 (+72 percent) and the rate of growth between 

2008 and 2012 (–14 percent). The relationship between 

high levels of problem loans and slow or negative 

growth in community bank loan balances is best illustrated by C&D loans. As has been the case in recent 

years, C&D loan balances showed the highest percentage decline of any community bank loan category in 

2012 (–9.5 percent, see Table 3), while they continued 

to show the highest rate of remaining noncurrent loans 

at year-end 2012 (7.8 percent, see Table 4). The 

progress that has been made to date in addressing these 

credit problems can be seen in the volume of total 

consolidation has been prevalent among community 

banks since the mid-1980s, the direction and pace of 

future industry consolidation are far from clear.

Community Bank Balance Sheet

Even as the number of FDIC-insured institutions 

declined in 2012, the total assets of both community 

and noncommunity banks increased during the year. 

Community bank assets grew by $47 billion (2.4 

percent) to $2 trillion in 2012 (see Chart 8), while 

noncommunity bank assets grew by $512 billion (4.3 

percent) to $12.4 trillion.

Net loans and leases held by community banks grew by 

1.6 percent in 2012. While this reversed the net decline 

in community bank lending observed in 2011, it 

remained below the 3.8 percent loan growth seen at 

noncommunity banks in 2012. Community banks saw 

expansion in agricultural, commercial and industrial 

(C&I), and consumer lending in 2012, and they 

continued to play a disproportionate role in providing 

credit to local farms and businesses. Community banks 

held 14 percent of industry assets at year-end 2012, but 

held 46 percent of small loans to businesses, shares that 

are unchanged from 2011.12

Meanwhile, community banks saw another substantial 

decline in their holdings of commercial real estate 

loans, especially construction and development (C&D) 

loans. It is in these portfolios that community banks 

have experienced the highest levels of noncurrent loans 

and the highest volumes of net loan charge-offs in the 

years following the financial crisis. Not only do charge12 Small loans to businesses include loans secured by nonfarm 

nonresidential properties and C&I loans in amounts under $1 million, 

and farmland and agricultural production loans in amounts under 

$500,000. 

Table 2

Change in the Number of Community and Noncommunity Banks Charters in 2012

Number of Institutions at Year-End 2011

Community 

Banks

Noncommunity 

Banks All Institutions

 6,799 558 7,357

Failures -51 0 -51

Intercompany Mergers -142 -10 -152

Intracompany Consolidations -35 -21 -56

Other Closings -11 -4 -15

All Closings -239 -35 -274

New Charters 0 0 0

Net Reclassifications to/from Community Bank Status -16 16 0

Number of Institutions at Year-End 2012 6,544 539 7,083

Source: FDIC.

Chart 8

Community Bank Assets Grew by 2.4 Percent in 2012

Billions of Dollars

$1,224 $1,243

$450 $464

$299 $313

$0

$500

$1,000

$1,500

$2,000

$2,500

2011 2012

Source: FDIC.

+1.6%

Net Loans and Leases

+3.0%

Securities

+4.7%

Other Assets

2012 Community Bank Asset Growth:

+2.4%
FDIC Quarterly 33 2013, Volume 7, No. 4

Community Bank Developments in 2012

historical levels, 1-to-4 family residential loan performance at community banks was better than that at 

noncommunity banks. The 1-to-4 family noncurrent 

rate at noncommunity banks actually rose to 8.9 

percent in 2012 from 8.7 percent in 2011.

The condition of balance sheets is not the only factor 

that influences loan volumes at community banks. 

Loan demand also declined sharply during and after 

the recession of 2007–2009, and has been slow to 

recover since the recession ended. The Federal Reserve 

Senior Loan Officer Opinion Survey showed that the 

net percent of banks reporting stronger demand for 

commercial loans on the part of small firms was consistently negative during a 13-quarter period that 

extended from the end of 2006 through the end of 

C&D loan charge-offs that community banks have 

made since 2007 ($21 billion) and the fact that their 

noncurrent loan rate for C&D loans has declined by 

more than 40 percent from its peak in the first quarter 

of 2010.

Other community bank loan categories also continue 

to display elevated levels of problem loans, even as 

noncurrent rates continue to recede. Some 2.3 percent 

of 1-to-4 family residential mortgage loans held by 

community banks were noncurrent at year-end 2012. 

Although this represents a decline from 2.5 percent in 

2011, the noncurrent rate for community bank 1-to-4 

family residential mortgage loans never exceeded 1.6 

percent between 1990 and 2008. While noncurrent 

rates for many loan categories are high relative to 

Table 3

Changes in the Community Bank Balance Sheet, 2011–2012

Loan or Asset Category

Year-End 2011 Year-End 2012 Change 2011–2012

Dollars in 

Billions

Percent of 

Total Assets

Dollars in 

Billions

Percent of 

Total Assets

Dollars in 

Billions

Percent 

Change

Mortgage Loans* $400.3 20.3% $404.6 20.0% $4.4 1.1%

Consumer Loans $53.0 2.7% $54.4 2.7% $1.3 2.5%

Commercial Real Estate (CRE) Loans** $523.8 26.6% $517.2 25.6% -$6.5 -1.2%

Construction and Development (C&D) 

Loans $83.8 4.2% $75.9 3.8% -$8.0 -9.5%

Commercial and Industrial (C&I) Loans $163.5 8.3% $171.0 8.5% $7.5 4.6%

Agricultural Loans*** $85.5 4.3% $92.5 4.6% $7.0 8.2%

Other Loans and Leases $21.4 1.1% $25.7 1.3% $4.3 19.9%

Less: Loan Loss Provisions and 

Unearned Income $23.5 1.2% $22.3 1.1% -$1.2 -5.2%

Net Loans and Leases $1,223.9 62.0% $1,243.1 61.6% $19.2 1.6%

Securities $450.2 22.8% $463.5 23.0% $13.4 3.0%

Other Assets $298.5 15.1% $312.5 15.5% $14.0 4.7%

Total Assets $1,972.6 100.0% $2,019.1 100.0% $46.5 2.4%

Source: FDIC.

* Mortgage loans include home equity lines of credit, junior liens, and other loans secured by residential real estate.

** CRE loans include construction and development loans, loans secured by multifamily properties, and loans secured by nonfarm, nonresidential real estate.

*** Agricultural loans include production loans and loans secured by farm real estate. 

Table 4

Community Bank Noncurrent Rates, 2011–2012

Loan Category

2011 Noncurrent 

Rate

2012 Noncurrent 

Rate

Change in 

Noncurrent Rate 

2011–2012

Mortgage Loans* 2.5% 2.3% -0.2%

Consumer Loans 0.9% 0.9% 0.0%

Commercial Real Estate (CRE) Loans** 4.4% 3.3% -1.1%

Construction and Development (C&D) Loans 11.2% 7.8% -3.4%

Commercial and Industrial (C&I) Loans 2.1% 1.7% -0.4%

Agricultural Loans*** 1.0% 0.8% -0.2%

All Loans and Leases 3.0% 2.4% -0.6%

Source: FDIC.

* Mortgage loans include home equity lines of credit, junior liens, and other loans secured by residential real estate.

** CRE loans include construction and development loans, loans secured by multifamily properties, and loans secured by nonfarm, nonresidential real estate.

*** Agricultural loans include production loans and loans secured by farm real estate.
FDIC Quarterly 34 2013, Volume 7, No. 4

counties by both measures since 1984. The relative 

concentration of noncommunity banks in metropolitan 

statistical areas (MSAs) is one of the factors that have 

allowed these institutions to grow their assets ten times 

faster than community banks since 1984.

Comparative Financial Performance: 

Community Versus Noncommunity Banks

Community banks continued to improve their earnings 

in 2012 following the severe downturn in profitability 

and earnings that they experienced during and after 

the financial crisis. Their aggregate pretax ROA rose 

to 1.06 percent in 2012 from 0.74 percent in 2011 

(see Chart 9). Moreover, the gap between community 

and noncommunity bank profitability narrowed to 

0.42 percent from 0.59 percent. Although the pretax 

ROA of community banks has increased in each of 

the past three years from a low of –0.13 percent in 

2009, it remains well below the average of 1.5 percent 

observed in the period 1992 through 2006. Likewise, although the disparity between community and 

noncommunity bank earnings has narrowed, it is still 

comparable to the gap that existed in 2005. It remains 

to be seen whether this disparity is a persistent trend 

or simply the result of a slower recovery on the part of 

community banks.

Low interest rates continued to squeeze net interest 

income in 2012 (see Chart 10). Community bank net 

interest income fell to 3.37 percent of average assets in 

2012 from 3.43 percent in 2011. Community banks still 

generated higher net interest income than did noncommunity banks, which saw their net interest income fall 

to 2.94 percent of average assets in 2012. As long as 

short-term interest rates remain at zero, net interest 

margins are likely to remain under pressure as higheryielding loans and securities come to maturity. Because 

community banks earned 78 percent of their net operating revenue from net interest income in 2012, versus 61 

percent for noncommunity banks, the squeeze on net 

2010. Since then, however, the net percent reporting 

stronger demand has been positive in all but one quarter. These trends point to a gradual improvement in 

loan demand, which should contribute to loan growth 

at community banks beyond 2012.

The Geography of Community Banks

As expected, the geographic characteristics of community banking changed little during 2012. While 

community banks held just 14 percent of industry 

assets at year-end, they continued to hold the majority of bank deposits in rural and micropolitan counties 

(see Table 5). Community banks were three times 

more likely than noncommunity banks to locate offices 

in a nonmetro area in 2012, and were four times more 

likely to operate offices in rural counties, as was the 

case in 2011.

In 2012, 615 U.S. counties (627 in 2011) would not 

have had any physical banking offices operated by 

FDIC-insured institutions if not for those operated by 

community banks. Another 642 counties where community banks operated had fewer than three noncommunity banking offices present. This means that more than 

1,200 U.S. counties (of 3,238 total), encompassing more 

than 16 million in population, would have very limited 

physical access to mainstream banking services without 

the presence of community banks. Although the office 

and deposit shares of community banks continue to 

decline, they still play a leading role in providing financial services in many parts of the country.

Noncommunity banks continued to hold a dominant 

market share in the nation’s 1,169 metropolitan counties in 2012. Noncommunity banks operated 71 percent 

of all banking offices and held 86 percent of total 

deposits in metropolitan counties at year-end, with both 

figures up slightly from 2011. As described in the Study, 

these counties not only account for the vast majority of 

U.S. population and gross domestic product (GDP), but 

also have grown faster than rural and micropolitan 

Table 5

Community Bank Share of Banking Offices and Total Deposits Located in Metro, Micro, and Rural Counties

Year

Community Bank Share of Banking Offices, 

by County Type (Percent)

Community Bank Share of Total Deposits, 

by County Type (Percent)

Metro Micro Rural Total Share Metro Micro Rural Total Share

1992 39% 65% 78% 46% 31% 62% 75% 36%

2002 33% 59% 72% 40% 21% 53% 71% 26%

2012 29% 57% 71% 36% 14% 56% 71% 18%

Source: FDIC.

Note: Based on 2010 county designations made by the U.S. Office of Management and Budget. Deposit and office data are merger-adjusted to year-end.
FDIC Quarterly 35 2013, Volume 7, No. 4

Community Bank Developments in 2012

percent in the first nine months of 2013.13 The higher 

long-term interest rates observed through September 

2013 will make it difficult for banks to replicate their 

2012 gains in noninterest income.

Community and noncommunity banks maintained 

similar levels of noninterest expenses in 2012. Community banks reported noninterest expenses equal to 3.01 

percent of average assets in 2012, versus 3 percent in 

2011 (see Chart 13). Noncommunity banks reported 

noninterest expenses of 2.99 percent of average assets in 

2012, down from 3.05 percent in 2011. As described in 

the Study, bank Call Report data do not facilitate the 

breakdown of noninterest expenses into regulatory and 

13 Source: Federal Reserve Board (Haver Analytics).

interest income has had a disproportionate impact on 

overall community bank earnings.

Both community and noncommunity banks earned 

higher levels of noninterest income in 2012. Community banks saw their ratio of noninterest income to 

average assets rise from 0.82 percent in 2011 to 0.96 

percent in 2012, while noncommunity banks saw 

their ratio rise from 1.85 percent to 1.9 percent (see 

Chart 11). Also, as depicted in Chart 12, virtually all of 

the increase in community bank noninterest income 

can be attributed to gains on asset sales, which were to 

some extent facilitated by the decline in long-term 

interest rates that occurred during the year. The tenyear Treasury yield fell from 2.8 percent in 2011 to 1.8 

percent in 2012, before rising again to an average of 2.2 

Chart 9

Pretax Return on Assets, 1985–2012

Percent

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

Community Banks

Noncommunity Banks

1.06%

Source: FDIC.

1.48%

Chart 11

Noninterest Income to Average Assets, 1985–2012

Percent

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

Community Banks

Noncommunity Banks

Source: FDIC.

0.96%

1.90%

Chart 12

Gains on Asset Sales Drove an Increase in

Community Bank Noninterest Income in 2012

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

2011 2012

Gains on Asset Sales

Fiduciary Income

Service Charges on

Deposit Accounts

Other

Source: FDIC.

Community Bank Noninterest Income as a Percent of Average Assets

0.82%

0.96%

Chart 10

Net Interest Income to Average Assets, 1985–2012

Percent

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

Community Banks

Noncommunity Banks

Source: FDIC.

3.37%

2.94%
FDIC Quarterly 36 2013, Volume 7, No. 4

revenue—as has been the case in every year since 

2010—the post-crisis trend continues to be a narrowing 

of this efficiency gap. Despite this narrowing, declining 

net interest income continued to put upward pressure 

on the community bank efficiency ratio in 2012 (see 

Table 6). It may prove difficult for community banks to 

generate further improvements in this ratio until interest rates rise to levels more in line with historical norms.

For both community and noncommunity banks, a key 

element of improved profitability in 2012 was the 

continued rapid decline in loan-loss provisions. 

Community bank loss provisions fell to $6.5 billion 

(0.33 percent of average assets) in 2012 from $10.9 

billion (0.56 percent) in 2011 and a peak of $22.5 

billion (1.16 percent) in 2009 (see Chart 15). Noncommunity banks recorded loss provisions of $51.7 billion 

nonregulatory expenses. Appendix B of the Study 

discusses the results of interviews with bankers related 

to regulatory costs and overhead expenses.14 Although 

the stability of overhead expenses is a positive trend for 

the community banking sector, it does not preclude the 

possibility that the regulatory component of these costs 

could be rising.

A useful metric that relates the various elements of 

income and expense is the efficiency ratio, or the ratio of 

overhead expenses to net operating revenue.15 As 

described in the Study, a sizable gap has emerged since 

the late 1990s between the efficiency ratios of community and noncommunity banks. During that period, 

community banks experienced a marked increase (deterioration) in their efficiency ratio, most of which was 

attributable to the gradual decline of their net interest 

income.

The efficiency ratio of community banks improved in 

2012, declining to 69.8 percent from 70.6 percent in 

2011, while the efficiency ratio for noncommunity 

banks improved to a smaller extent, declining to 61.9 

percent from 62 percent (see Chart 14). These changes 

reduced the efficiency gap between community and 

noncommunity banks to 7.8 percentage points, or less 

than one-half the size of this gap as recently as 2010. 

While community banks on average remained less 

efficient than noncommunity banks in generating 

14 For a discussion of regulatory costs at community banks, see: 

http://www.fdic.gov/regulations/resources/cbi/report/CBSI-B.pdf.

15 Formally, the efficiency ratio is expressed as: 

Efficiency Ratio = 

 Noninterest Expense

Net Interest Income + Noninterest Income 

.

Chart 13

Noninterest Expense to Average Assets, 1985–2012

Percent

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

Community Banks

Noncommunity Banks

Source: FDIC.

3.01%

2.99%

Chart 14

Efciency Ratio, 1985–2012

Percent

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

Community Banks

Noncommunity Banks

Source: FDIC.

69.6%

61.9%

Chart 15

Loan-Loss Provisions to Average Assets, 1985–2012

Percent

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

Community Banks

Noncommunity Banks

Source: FDIC.

0.33%

0.43%
FDIC Quarterly 37 2013, Volume 7, No. 4

Community Bank Developments in 2012

underperformed other community bank lending 

specialty groups, reflecting the ongoing effects of the 

real estate downturn. These two specialty groups did 

show a marked improvement in their profitability in 

2012, mostly due to lower loan-loss provisions (see 

Table 7). Nonetheless, consumer and agricultural 

specialists continued to outperform other types of 

community banks in 2012.

Capital Formation at Community Banks16

Improved profitability at community banks in 2012 was 

driven by higher levels of net income. Community 

banks as a group generated $16.4 billion in net income 

in 2012, up from $10.6 billion in 2011 and a crisis low 

of –$2.8 billion in 2009. The sustained improvement in 

community bank earnings since 2009 has once again 

afforded these institutions the opportunity to generate 

new capital through retained earnings. Community 

16 Although the term “capital formation” is frequently used in national 

income accounting to describe increases in the stock of physical 

capital, it is used here to represent additions to equity capital by 

individual financial institutions.

(0.43 percent of average assets) in 2012, down from 

$66.6 billion (0.57 percent) in 2011 and a peak of 

$141.4 billion (1.25 percent) in 2009.

Chart 15 shows that provision expenses of noncommunity banks far exceeded those of community banks at 

their 2009 peak, and have declined faster since then. 

As year-over-year reductions in provision expenses at 

FDIC-insured institutions become progressively smaller 

over time, growth in community bank earnings will 

increasingly depend on their ability to increase 

revenues.

Community banks are not a uniform group of institutions, and there has always been significant variation 

in performance among community bank lending 

specialty groups. The Study identified three lending 

specialty groups (agricultural specialists, diversified 

nonspecialty lenders, and consumer specialists) as 

consistently outperforming other groups in terms of 

pretax ROA during the 1984–2011 study period, while 

CRE specialists underperformed for the study period as 

a whole. During 2011, CRE and mortgage specialists 

Table 6

Sources of Change in the Community Bank Efficiency Ratio, 2011–2012

Ratio 2011 2012

Change in Income or 

Expense Ratio, 

Percentage Points 

2011–2012

Contribution to Change 

in Efficiency Ratio, 

Percentage Points 

2011–2012

Net Interest Income

Assets 3.43% 3.37% -0.06 0.97

Noninterest Income

Assets 0.82% 0.96% 0.14 -2.30

Noninterest Expense

Assets 3.00% 3.01% 0.02 0.40

Efficiency Ratio 70.6% 69.6% -0.93

Source: FDIC.

Table 7

Community Bank Pretax Return on Assets (ROA) by Lending Specialty Group

Lending Specialty Group

Year All Years: 

2006–2010 2011 2012 1985–2012

Agricultural Specialists 1.25% 1.38% 1.51% 1.41%

Consumer Specialists 0.89% 2.22% 1.53% 1.27%

C&I Specialists 1.04% 0.89% 1.30% 1.04%

Mortgage Specialists 0.64% 0.69% 0.93% 1.00%

CRE Specialists 0.26% 0.36% 0.82% 0.66%

No Specialty 1.05% 1.08% 1.18% 1.27%

Multi-Specialists 0.69% 0.72% 1.17% 0.99%

Total 0.61% 0.74% 1.06% 1.03%

Source: FDIC. Lending specialty groups are defined on page 5-3 of the FDIC Community Banking Study.

Note: Figures represent weighted average pretax return on assets for federally insured community banks reporting in each group during the period.
FDIC Quarterly 38 2013, Volume 7, No. 4

Reserve’s Comprehensive Capital Analysis and Review 

(CCAR) process or have moved cautiously in restoring 

their dividends in the wake of the crisis.18

Despite the importance of retained earnings to capital formation at both community and noncommunity 

banks, capital raising from external sources continues 

to be important to both groups. During 2012, 549 

community banks raised $3.4 billion in new capital 

from external sources. This capped a five-year period 

in which community banks as a group raised a total of 

nearly $40 billion from the capital markets, and reflects 

continued investor confidence in the community banking model. Altogether, this new capital represented 18 

percent of the total equity capital held by community 

banks at the end of 2012. In addition, none of the 

$3.4 billion in external capital raised by community 

banks during 2012 was obtained through participation 

in either the government-sponsored Capital Purchase 

Program, which stopped disbursing in 2009, or the 

Small Business Lending Fund, which stopped disbursing 

in 2011.

With the capital obtained during 2012 through retained 

earnings and from external sources, community banks 

were able to increase their capitalization levels as 

measured by both the leverage and total risk-based 

capital ratios (see Table 9).19 Community banks have 

historically held higher levels of capital than have 

noncommunity banks, and this pattern continued in 

2012. At the end of the year, community banks held 

equity capital equal to 10.20 percent of total assets, 

compared with 8.97 percent for noncommunity banks. 

18 For details on the CCAR process and the Federal Reserve’s dividend 

guidance to participating large banking organizations, see: http://

www.federalreserve.gov/newsevents/press/bcreg/20130314a.htm.

19 It should be noted that banks report other changes to equity capital, 

some of which are relatively large, but these changes do not represent 

net capital formation and are not part of the analysis in this chapter.

banks generated $7.5 billion in capital through retained 

earnings in 2012 (see Table 8), up from $4.2 billion in 

2011. Some 69 percent of the total increase in community bank capital in 2012 was generated through 

retained earnings, while the remaining $3.4 billion 

(31 percent of the total increase) was raised from 

external sources.

Although earnings were an important source of capital formation during 2012, community banks devoted 

a smaller share of net income to retained earnings 

during the year. Among community banks that earned 

a profit for the year, the earnings retention ratio fell 

to 51 percent in 2012 from 58 percent in 2011, with 

the remaining income being paid out in dividends. 

Although the community bank earnings retention 

ratio remained near its ten-year average in 2012, it is 

well below the average level of 62 percent reported 

between 1984 and 2002. Meanwhile, noncommunity 

banks continued to pay dividends at a much higher 

rate than did community banks, retaining only 31 

percent of 2012 earnings and paying out the remaining 

69 percent in dividends.

Community banks historically have been more reliant 

than noncommunity banks on capital raised through 

retained earnings, but the opposite was true in 2012.17

Noncommunity banks generated $37.3 billion in 

retained earnings during the year, accounting for 84 

percent of their total additions to equity capital. Part of 

the success by noncommunity banks in generating 

retained earnings is attributable to a more rapid recovery in their net income following the crisis, from a low 

of –$7.1 billion in 2009 to $124.7 billion in 2012. In 

addition, some of the nation’s largest banks either 

remain unable to pay dividends under the Federal 

17 For a historical comparison of capital raised from retained earnings 

by community and noncommunity banks, see Table 6.1 of the FDIC 

Community Banking Study.

Table 8

Total Additions to Equity Capital Through Retained Earnings and 

New Capital Raised From External Sources, 2012

Bank Type

Additions to Capital Through:

Retained Earnings Total

New Capital Raised From 

External Sources

$ Billions % of Total $ Billions % of Total $ Billions

Community Banks $7.5 69% $3.4 31% $10.9

Noncommunity Banks $37.3 84% $7.0 16% $44.3

Total $44.8 81% $10.4 19% $55.2

Source: FDIC.

Note: Figures are not adjusted to reflect merger activity.
FDIC Quarterly 39 2013, Volume 7, No. 4

Community Bank Developments in 2012

however, and future earnings growth will eventually 

need to be based on increases in net interest income. 

Even so, community banks were able to augment their 

equity capital by $10.9 billion during 2012, of which 

$7.5 billion was derived from retained earnings.

Despite their relatively low 14 percent share of banking 

industry assets, community banks continue to play an 

important role in the U.S. financial system. At year-end 

2012, community banks represented 92 percent of 

FDIC-insured banking charters and 95 percent of U.S. 

banking organizations, and held 46 percent of the 

industry’s small loans to farms and businesses—all 

percentages that were unchanged from 2011. Additionally, they continue to hold the majority of deposits in 

offices located in rural and micropolitan areas, and 

there were 615 U.S. counties in 2012 where the only 

physical banking offices were those operated by community banks.

The ability to generate capital and support balanced 

growth through retained earnings has traditionally been 

a recipe for long-term success for many community 

banks. Although operating conditions remain challenging on a number of fronts, these developments mark 

continued progress in the community banking sector’s 

recovery from the effects of the financial crisis.

Author: Benjamin R. Backup

Economic Analyst

Division of Insurance and Research

The community bank total risk-based capital ratio at 

year-end 2012 was 16.47 percent, compared with 14.89 

percent at noncommunity banks.

Conclusion

By many measures, 2012 was the best year for community banks since the beginning of the financial crisis. 

The number and rate of community bank failures 

declined, even as voluntary community bank closures 

increased. Although there were no new institutions 

chartered in 2012, recent signs point to renewed interest in new bank charters. Community banks continued 

to strengthen their balance sheets in 2012 by reducing 

problem assets and increasing capital levels. Although 

community bank assets grew at a slower rate than did 

those of noncommunity banks, the improvement in 

credit performance at community banks made it possible for them to achieve a net growth rate of 2.4 percent 

of total assets for the year.

Community bank earnings continued to recover in 

2012, with net income totaling $16.4 billion—the 

second-highest annual figure on record. Pretax ROA 

exceeded 1 percent for the first time since 2007, and 

the profitability gap between community and noncommunity banks narrowed by 17 basis points from 2011. 

The improvement in community bank profitability was 

driven by higher noninterest income and lower loss 

provisions, which more than offset a decline in net 

interest income. The factors that drove increased 

profitability in 2012 may prove to be short-lived, 

Table 9

Capital Ratios at Community and Noncommunity Banks, 2011–2012

Bank Type Year-End 2011 Year-End 2012

Leverage Ratio Community Banks 10.02% 10.20%

Noncommunity Banks 8.91% 8.97%

Total RBC Ratio Community Banks 16.27% 16.47%

Noncommunity Banks 15.16% 14.89%

Source: FDIC. The leverage ratio measures common equity, certain types of preferred equity, and retained earnings as a percentage of total assets. The total risk-based capital ratio uses a 

broader regulatory definition of capital and adjusts total assets to reflect a range of on- and off-balance-sheet exposures.

Note: Capital ratios for 2011 are adjusted to account for acquisitions that occurred in 2012.