David S. Dahl - Regional Economist
Published July 1, 1998 | July 1998 issue
"All politics is local," said the late Speaker of the House Tip O'Neill, and the same statement certainly could be made about community banking. The district's urban community banks are facing more competition from other financial institutions than their rural counterparts, but rural community banks are more concerned about their market's viability than are small banks in urban areas.
This is the primary conclusion emerging from the Minneapolis Fed's third annual community banking survey, which classified respondents as either urban or rural.
Urban and rural community banks face a different set of competitors. Urban banks, which have 46 percent of their loans in real estate, see their most intense competition coming from mortgage companies. Rural banks, with 35 percent of their loans in agriculture, see their most intense competition coming from farm credit banks. Both urban and rural banks also see intense competition from other community banks, lending subsidiaries of machinery and auto dealers, credit unions and brokers securities firms.
Only 31 percent of rural bank respondents see intense or very intense competition from large regional banks, but location makes a difference as 51 percent of regional banks expect such competition from their peers.
While the mix of competitors facing urban and rural banks varies, the overall level of competition is higher for urban banks. On average, 54 percent of urban bank respondents are experiencing intense and very intense competition from all financial service providers, contrasted to 44 percent for rural community banks. When asked to rank factors affecting their market, 70 percent of urban banks ranked increased competition as the number one challenge, compared to 52 percent of the rural banks.
While urban banks face greater competition, rural banks face a greater challenge from local economic conditions. Forty-one percent of rural bank respondents described prospects for their market over the next two years as either fair or poor, as opposed to 17 percent of urban bank respondents. Fifty percent of the rural bank respondents were located in counties that lost population between 1990 and 1997, contrasted to 12 percent of urban banks. Not surprisingly, 25 percent of rural bank respondents listed aging and/or declining local population as the number one market challenge vs. only 11 percent of the urban respondents.
At the same time community banks are coping with competitive and market conditions, they are scrambling to acquire funds. They cannot rely alone on demand and time deposits to fund loans; about 13 percent of all respondents, regardless of location, refused or reduced loan requests because of a shortage of loanable funds. Increasingly, banks are turning to the Federal Home Loan Bank (FHLB) to secure needed funds; 60 percent of urban bank respondents and 42 percent of rural banks anticipate FHLB advances will account for an increasing share of their funding over the next two years.
Moreover, the scramble for funding is foreseen curbing profits. Fifty-seven percent of banks, regardless of location, expect that changes in their funding over the next two years will decrease their profitability. So far, though, profitability has held up quite well despite these challenges: In 1997 urban bank respondents earned 1.1 percent on average assets and rural banks earned 1.3 percent.
Community banks are contemplating changes to maintain their profitability. Rural banks lag behind urban banks in offering ATM and telephone banking, and over the next two years several plan to expand their product lines in these areas. Home banking and financial planning are two services that both many urban and rural banks are thinking of offering in the next two years. Nevertheless, a large number of respondents, regardless of bank size, remain unsure about offering in-store branches, loans to subprime customers, home banking and financial planning.
Another response to the challenges confronting banks is either to expand or sell out. Over the next two years, around 21 percent of both urban and rural banks see themselves acquiring other community banks. Nine percent of rural banks, however, see themselves either being acquired by another community bank or other banking organization, as contrasted to only 3 percent of the urban banks.
In March, 725 Ninth District banks with assets less than $150 millionand which are not part of a banking organization with assets in excess of $150 millionwere surveyed; 331 banks, or 46 percent, of the banks responded.
Respondents in this analysis have been classified as either rural or urban banks. Urban banks are the 121 respondents who are located in Metropolitan Statistical Area (MSA) counties or in the counties adjacent to MSA counties. Rural banks are the 211 respondents who are located in the district's remaining counties.