Alabama Banking: The State of the State's Banking Industry

147 Pages·2016·12.95 MB·English

by  Jennifer Ryan

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Alabama Banking:
The State of the State’s Banking Industry*

Dr. James R. Barth
Lowder Eminent Scholar in Finance

Dr. Jitka Hilliard
Assistant Professor of Finance

Dr. John S. Jahera Jr.
Lowder Professor of Finance

Yanfei Sun
Ph.D. Finance Student

January 21, 2016

*This study was completed thanks to the generous financial support provided to the Center for
Governmental Services at Auburn University by the lead sponsors, American Bankers Association,
Independent Community Bankers of America and Regions Bank, and sponsors, First Community Bank,
Keystone Bank, Promontory Financial Group, First Southern State Bank, River Bank Trust, Jones Walker,
Mauldin & Jenkins, Newsome Law, LLC, United Bank, ServisFirst Bank, Boli Portfolio Strategies Inc., L.
Walter Crim, David D. Swift, Dale Matthews and Robert R. Jones. The authors also are grateful for the
excellent assistance provided by our graduate students Shoushu Chen, Sunghoon Joo, Xiaoyan Wei, and
Jiayi Xu, as well as our colleague Valentina Hartarska. Dr. Don-Terry Veal, who headed the Center for
Governmental Services, which was a division of University Outreach, until moving to Morgan State
University to be the Chief of Staff to the President, deserves special thanks for all his support and
encouragement in starting and seeing the project through to its completion.
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Alabama Banking:
The State of the State’s Banking Industry

Executive Summary
Alabama has historically struggled to improve its overall economic performance relative to many
other states, given that all too often it ranks near the bottom. In this regard, a strong banking system
is an essential factor if our state is to improve its standing in terms of economic growth and
development. It is well known that banks play a key role in facilitating payments, providing a safe
place for savings and lending funds to both individuals and businesses. Given their importance,
our report provides information on the performance and condition of banks headquartered in
Alabama as each and every bank works to contribute to economic progress throughout the state.
Our report uses publically available data to describe the various business models of the banks as
well as to examine their condition and performance as of the third quarter of 2015 and the longer
period 2000 to 2015. Somewhat uniquely, the report also presents the results of a comprehensive
survey of the banks to determine their main areas of concern in today’s challenging economic and
regulatory environment. Based on this information, we suggest several policy recommendations
that could help banks better serve the needs of individuals and businesses in counties throughout
the state.
Briefly, some of our findings and conclusions are as follows.
 As of the end of the third quarter of 2015 there were 131 banks headquartered in Alabama.
These banks had $253 billion in total assets, operated 3,065 branches, with 953 located
within the state, and ranged in size from $16 million to $124 billion in assets. Based on
aggregate return-on-assets (ROA), Alabama banks ranked 40th among all the states.
 As of 2012, there were 386,661 small businesses operating in Alabama and these firms
make up 96.8 percent of all employers in the state. These small businesses account for
about half the employees—764,207 in all—of the state’s private work force. Banks in the
state had provided $14 billion in loans to these businesses as of the third quarter of 2015.
 Based on an analysis of bank and county data, we find that bank salaries and county income
are positively and significantly related, which demonstrates the importance of having
banks/bank branches located in counties. We also find the more bank employees, the
greater the employment in each county, the more bank loans the higher county income, and
the more bank loans and the higher bank salaries the higher average weekly wages in
counties. Clearly, this is evidence that banks play an important role in promoting economic
growth and development of counties throughout the state.

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 Based on our survey of banks, 88 percent consider regulatory burden to be the biggest
threat to their business models, which is not a surprising finding given all the costly
regulations imposed on banks in recent years.
 Second in importance is the current environment of political and regulatory uncertainty,
with 78 percent noting that it is a major impediment to their operations and performance.
 In terms of the competitive environment, 73 percent report their main competitive threat is
from nonbank financial firms, which are subjective to less onerous regulation.
 About 70 percent reported that vulnerability to cyber-attacks is a serious concern.
Based on our analysis of the data and the survey results, we recommend a few policy actions that
may help improve the ability of banks to better serve individuals and businesses throughout the
state. First and foremost, we support Senator Richard Shelby’s, who is Chairman of the U.S. Senate
Banking, Housing, and Urban Affairs Committee, efforts to reverse the harmful effects of the
“Dodd-Frank Wall Street Reform and Consumer Protection Act.” This is extremely important
because our analysis of individual bank data is consistent with the view of banks that recent
regulations have increased their costs, but not their revenues. To the degree possible, the
Department of Banking in Alabama should likewise explore actions that it can take to ease the
regulatory burden and associated costs for state-chartered banks. Furthermore, banking regulations
should be eased to allow banks more opportunities to serve underbanked or nonbanked consumers
by offering short-term loans similar to what are being provided currently by payday and similar
types of lenders.

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Introduction
Economic performance, in terms of income per capita, varies widely across the fifty states, and as
the people in Alabama know too well, their state has ranked near the bottom, and fairly consistently
so, by this measure over many decades.
Part of the problem associated with Alabama’s low ranking is the on-going challenges faced by its
banks: when businesses do not grow and expand, or worse yet actually fail, local economies
stagnate or even decline economically, and the crippling effects extend to banks as well, in the
form of a shrinking customer base, loan defaults, and fewer sources of revenue. Likewise, when
banks close branches due to declining economic activity, especially in poorer communities, those
residents lose access to traditional and basic bank services and products, including business and
home-mortgage loans, which further contributes to serious adverse effects for local economic
activity.
An improvement to the state’s poor ranking is more achievable when one better understands the
linkages between local growth and the important services provided by banks. When banks provide
essential services in ways that benefit overall economic performance as well as remain financially
sound, everyone wins. The purpose of this report is to provide information on the financial
condition of Alabama’s banks and the important role they play for local economic growth and
development.1
We provide information on and an analysis of bank data so as to (1) provide a national perspective
of Alabama’s banking industry; (2) demonstrate the important role banks play in improving state
living standards; (3) show the differences in the financial condition of and business models of
individual state banks; (4) document how Alabama banks are working to improve the economic
and financial health of local communities as well as the state overall We also survey Alabama
banks themselves about several important issues so as to gauge their view of potential barriers that
they believe impede their ability to offer key services on reasonable terms. The results of this
survey are extremely important because the response rate was quite respectable as one can expect
based on this type of survey. More importantly, the banks themselves are intimately involved in
the business of earning a decent profit as well as remaining solvent so their views of their
challenges in surviving merit special and serious attention. In particular, we find that banks report
that the biggest threat to their business model is the regulatory burden. Of the responding banks,
88 percent perceive regulatory burden as the biggest threat to their business model, followed by
political and regulatory uncertainty (78 percent).
Banks are, have been, and will in the years ahead be confronting several factors affecting their
operations—competitive digital technologies and the ongoing costs associated with regulatory
reforms, to name but two of the more important factors. Indeed, with respect to the regulatory
reforms, individual bank data is presented that is consistent with the view of banks that recent
regulations have increased their costs, but not their revenues. In any event, we highlight some of
the concerns relating to these two key factors in the survey section. It is understood, of course, that

1 Near the end of the report, we provide a bibliography of several recent studies focusing on community banks. In contrast to
these studies, the focus of our report is on the banking industry in just Alabama, with detailed information on each and every
bank in the state as well as responses to a survey sent to the banks regarding important issues as perceived by them.
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state and local governments must recognize impediments to the provision of bank services, and
act to mitigate them so as to not limit the ability of banks to satisfy the demands of their customers.
This report relies on public data, most of which are available from the Federal Deposit Insurance
Corporation (FDIC), to examine the financial condition of and business models of banks as well
as the role they play in providing credit and related services to local communities throughout the
state. This assessment covers a relatively long period, from 2000 to the third quarter of 2015, so
as to capture events prior to, during, and after the serious financial crisis and severe recession that
occurred from late-2007 to mid-2009.
As of the end of the third quarter of 2015, 131 banks were headquartered in Alabama. These banks
held $253 billion in total assets, operated 3,065 branches, with 953 located within the state, and
ranged in size from $16 million to $124 billion in assets. Eight of these banks held more than $1
billion in assets, while the remaining 123 banks satisfy a typical definition of a small bank.
It might be noted at the outset that small businesses play an important role for continued economic
growth and job creation—not only at the state level, but the county level as well.
In this regard, based in the most recent available data, there were 386,661 small businesses
operating in Alabama at year-end 2012, and these firms make up 96.8 percent of all employers in
the state. These small businesses had a tremendous impact on state employment: they accounted
for about half the employees—764,207 in all—of the state’s private work force. These firms
created 24,809 net new jobs.2
Taken together, the 131 banks headquartered in Alabama provided $169 billion in various types
of loans to individuals and businesses, as of the third quarter of 2015. Of the total loans, banks
provided $14 billion in small-business loans. Alabama’s 123 small banks (i.e., those with less than
$1 billion in assets) accounted for 26 percent of these loans. Although this appears to be a relatively
small share, it should be noted that the share is more than twice as large as the share of total assets
accounted for by small banks. It is typically a characteristic of small banks across the nation as
well that they account for a disproportionate share of small-business loans based on their share of
total assets.

Trends in US Banking Over Three Decades
The US banking industry has experienced dramatic change over the past 32 years. New
competitors have entered the market, even as the industry has undergone a significant and
continuing consolidation that accelerated with the passage of the Riegle-Neal Interstate Banking
Act in 1994, which allowed banks to branch nationwide for the first time. The Dodd–Frank Wall
Street Reform and Consumer Protection Act (Dodd-Frank Act) in 2010, moreover, allowed banks
to acquire other banks nationwide, by overriding state restrictions on such acquisitions.

2 See Alabama Small Business Profile, Office of Advocacy, SBA, 2015.
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Table 1 provides a look at trends in both the number of US banking organizations and their assets
from 1984 through the third quarter of 2015. A quick glance reveals the significant consolidation.
The number of thrifts and independent banks declined to 1,562 from 9,184 over the period, while
the number of credit unions declined to 6,123 from 18,375. The number of one-bank holding
companies and multi-bank holding companies also declined but not as dramatically in terms of
total numbers. The number of all types of institutions was 33,263 in 1984, whereas in the third
quarter 2015 the number was 12,064, nearly a two-thirds reduction in the total number.
Turning to assets, as Table 1 shows, the share of the total held by thrifts and independent banks
have declined to 6.7 percent from 37 percent over the period. Credit unions increased their share
to 7 percent from 3 percent. The biggest gains were made by one-bank holding companies (to 31
percent from 15 percent) and multi-bank holding companies (to 55 percent from 45 percent).
It is interesting to note that while multi-bank holding companies have remained dominant in terms
of accounting for the largest share of assets over the years, the current share of 55 percent is down
from the high of 66 percent in 2008. This, of course, was the year of the federal government bailout
of several hundred banks, including the biggest banks in the country.
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Table 1. Number and Assets of FDIC-Insured Banking Organizations and Credit Unions
Thrifts and Independent One-Bank Holding Multi-Bank Holding
Credit Unions Percentage of Grand Total
Banks Banks Companies
Year Thrifts and One-Bank Multi-Bank Thrifts and One-Bank Multi-Bank
Credit Credit
Independent Holding Holding Independent Holding Holding
Unions Unions
Banks Banks Companies Banks Banks Companies

Number ($ Billions) Number ($ Billions) Number ($ Billions) Number ($ Billions)
(Number ) (Number) (Number) (Number) (Assets) (Assets) (Assets) (Assets)
1984 9,184 1,386 4,975 567 729 1700 18,375 112 27.6 15.0 2.2 55.2 37.0 15.0 45.0 3.0
1985 8,802 1,475 5,099 537 875 1981 17,654 137 27.1 15.7 2.7 54.4 36.0 13.0 48.0 3.0
1986 8,354 1,594 5,001 502 959 2,232 16,928 166 26.7 16.0 3.1 54.2 35.0 11.0 50.0 4.0
1987 7,933 1,688 4,963 487 976 2,327 16,274 182 26.3 16.5 3.2 54.0 36.0 10.0 50.0 4.0
1988 7,399 1,803 4,916 512 973 2,422 15,709 197 25.5 17.0 3.4 54.2 37.0 10.0 49.0 4.0
1989 6,793 1,641 4,919 562 953 2,524 15,121 206 24.4 17.7 3.4 54.4 33.0 11.0 51.0 4.0
1990 6,293 1,407 4,869 619 963 2,623 14,549 222 23.6 18.3 3.6 54.5 29.0 13.0 54.0 5.0
1991 5,855 1,275 4,870 639 921 2,630 13,989 242 22.8 19.0 3.6 54.6 27.0 13.0 55.0 5.0
1992 5,486 1,183 4,805 674 876 2,679 13,385 270 22.3 19.6 3.6 54.5 25.0 14.0 56.0 6.0
1993 5,100 1,134 4,652 696 850 2,877 12,960 287 21.6 19.7 3.6 55.0 23.0 14.0 58.0 6.0
1994 4,692 1,133 4,522 693 838 3,193 12,551 299 20.8 20.0 3.7 55.5 21.0 13.0 60.0 6.0
1995 4,286 1,131 4,478 669 823 3,538 12,230 316 19.6 20.5 3.8 56.1 20.0 12.0 63.0 6.0
1996 3,961 1,124 4,428 779 821 3,704 11,887 336 18.8 21.0 3.9 56.3 19.0 13.0 62.0 6.0
1997 3643 1,095 4459 903 792 4,043 11,659 361 17.7 21.7 3.9 56.7 17.0 14.0 63.0 6.0
1998 3380 1,090 4398 932 745 4,509 11,392 399 17.0 22.1 3.7 57.2 16.0 13.0 65.0 6.0
1999 3,256 1,172 4,364 1,070 736 4,642 11,016 423 16.8 22.5 3.8 56.9 16.0 15.0 64.0 6.0
2000 3,153 1,329 4,395 1,295 701 4,839 10,684 450 16.7 23.2 3.7 56.4 17.0 16.0 61.0 6.0
2001 3,000 1,433 4,442 1,374 659 5,063 10,355 515 16.3 24.1 3.6 56.1 17.0 16.0 60.0 6.0
2002 2,854 1,456 4,498 1,614 611 5,366 10,041 575 15.9 25.0 3.4 55.8 16.0 18.0 60.0 6.0
2003 2,717 1,508 4,554 1,694 575 5,873 9,709 629 15.5 25.9 3.3 55.3 16.0 17.0 61.0 6.0
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Thrifts and Independent One-Bank Holding Multi-Bank Holding
Credit Unions Percentage of Grand Total
Banks Banks Companies
Year Thrifts and One-Bank Multi-Bank Thrifts and One-Bank Multi-Bank
Credit Credit
Independent Holding Holding Independent Holding Holding
Unions Unions
Banks Banks Companies Banks Banks Companies

Number ($ Billions) Number ($ Billions) Number ($ Billions) Number ($ Billions)
(Number ) (Number) (Number) (Number) (Assets) (Assets) (Assets) (Assets)
2004 2,584 1,643 4,570 1,862 554 6,603 9,346 668 15.2 26.8 3.2 54.8 15.0 17.0 61.0 6.0
2005 2,520 1,771 4,599 2,056 523 7,052 9,011 700 15.1 27.6 3.1 54.1 15.0 18.0 61.0 6.0
2006 2,442 1,674 4,567 2,333 518 7,855 8,662 732 15.1 28.2 3.2 53.5 13.0 19.0 62.0 6.0
2007 2,354 1,907 4,546 2,408 510 8,720 8,396 777 14.9 28.8 3.2 53.1 14.0 17.0 63.0 6.0
2008 2,286 1,322 4,524 2,843 476 9,676 8,089 833 14.9 29.4 3.1 52.6 9.0 19.0 66.0 6.0
2009 2,176 1,182 4,518 3,173 427 8,732 7,830 904 14.6 30.2 2.9 52.4 8.0 23.0 62.0 6.0
2010 2,095 1,217 4,422 3,226 399 8,876 7,605 934 14.4 30.5 2.7 52.4 9.0 23.0 62.0 7.0
2011 1,998 1,230 4,362 3,599 360 9,062 7,351 982 14.2 31.0 2.6 52.2 8.0 24.0 61.0 7.0
2012 1,882 1,145 4,276 3,892 342 9,413 7,070 1,043 13.9 31.5 2.5 52.1 7.0 25.0 61.0 7.0
2013 1,778 1,140 4,212 4,603 312 8,988 6,795 1,084 13.6 32.2 2.4 51.9 7.0 29.0 57.0 7.0
2014 1,654 1,151 4,115 5,027 284 9,376 6,513 1,136 13.2 32.7 2.3 51.8 7.0 30.0 56.0 7.0
Q3
1,562 1,136 4,024 5,301 265 9,363 6,213 1,195 12.9 33.4 2.2 51.5 6.7 31.2 55.1 7.0
2015
Source: Federal Deposit Insurance Corporation, https://www5.fdic.gov/sdi/index.asp; Credit Union National Association, http://www.cuna.org/Research-And-Strategy/Credit-
Union-Data-And-Statistics/.
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Figure 1 provides a graphical view of the same trends for the different types of depository institutions,
both in term of shares of numbers and assets. This figure more vividly shows the clear decline in the
overall number of institutions since 1984. Likewise, the share of assets held by multi-bank holding
companies can be seen to have grown dramatically.
Figure 1. Number and Assets of FDIC-Insured Banking Organizations and Credit Unions
Number Assets ($ Billions)
35,000 $18,000
$16,000
30,000
$14,000
25,000
$12,000
20,000
$10,000
$8,000
15,000
$6,000
10,000
$4,000
5,000
$2,000
0 $0
4891 5891 6891 7891 8891 9891 0991 1991 2991 3991 4991 5991 6991 7991 8991 9991 0002 1002 2002 3002 4002 5002 6002 7002 8002 9002 0102 1102 2102 3102 4102 5102
Credit Unions Asset Multi-Bank Holding Companies Asset One-Bank Holding Banks Asset 3
Q
Thrifts and Independent Banks Asset Credit Unions Number Multi-Bank Holding Companies Number
One-Bank Holding Banks Number Thrifts and Independent Banks Number
Source: Federal Deposit Insurance Corporation, https://www5.fdic.gov/sdi/index.asp; Credit Union National Association,
http://www.cuna.org/Research-And-Strategy/Credit-Union-Data-And-Statistics/.

Characterizing Business Models of US and Alabama Banks by Asset Concentration3
Table 2 provides a perspective of Alabama’s banks relative to all banks in the country by their
primary type of activity, as of the third quarter of 2015. The particular categorizations of banks are
based on asset concentration, as determined by the FDIC. The banks in Alabama represent 2.1
percent of total number of US banks and 1.6 percent of the total assets. (It should be noted that
Alabama’s population represents 1.5 percent of the US population.) Of the 6,279 US organizations,
just four are considered international banks, with not one being an Alabama bank. Commercial
lenders, of which there are 3,129 in the US (including 71 in Alabama), constitute the largest
category. These banks also held the largest amount of assets, at $5.5 trillion. The second-largest
category, in terms of numbers, are banks with an agricultural focus, and they accounted for $275

3 In the appendixes, more detailed information is provided on the 106 Alabama banks that were in continuous operation each and
every year over the period 2000 to the third quarter of 2015.
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