Closely held community banks have significantly outperformed widely held community banks in financial performance and operational efficiency, according to new research published today in the FDIC Quarterly. The findings, based on a survey of more than 1,300 banks in three FDIC regions, also showed that closely held banks tended to be older and more rural and that they were more likely to raise capital via retained earnings.
The advantages for closely held banks accrued most to banks in which there was a significant overlap between the ownership group and bank management, which the researchers said minimizes the possibility of conflict between principals and agents. Closely held banks with owners in active management had a pretax return on assets that was 21 basis points higher than closely held banks with non-active owners, and 30 basis points higher than widely held community banks. Closely held banks also saw advantages in efficiency.
The findings rebut arguments by some that the disadvantages of closely held banks — such as succession challenges and capital raising — outweigh the benefits of the structure. Indeed, a closely held ownership structure “may well be one of the keys to the success” of these banks, the researchers said.