Large community banks outpacing smaller counterparts

Minneapolis Fed Community Bank Survey

David S. Dahl | Regional Economist

Published July 1, 1997  | July 1997 issue

"Are independent community banks in the Twin Cities area headed the way of the corner drug store and the five-cent cigar?"

A St. Paul Pioneer Press article asked this question last year. Other journalists and banking analysts have also questioned community banks' prospects in the face of the competitive and technological changes sweeping the industry. With 10 percent of the nation's banks headquartered in the Ninth District, but accounting for only 2.5 percent of nation's commercial banking assets, community banks' fate is of special concern here.

To see how district community banks discern changes buffeting their industry, the Minneapolis Fed inaugurated a community banking poll last year and conducted a similar survey this May. This year's poll results mirror those of a year ago and continue to indicate that many community banks see the implementation of new technologies and services combined with consolidation as the means to counter the intense competition from other banks and financial services providers.

Differences in the survey are most pronounced between small banks, many of which are located in rural, agriculture-oriented counties, and large banks, which are located in larger communities less dependent on agriculture. Last year the return on average assets for large respondent banks was 1.4 percent, contrasted to 1.1 percent for small respondent banks.

Competition: According to the survey results, one of the major differences was the degree to which banks face competition.

  • Large bank respondents expect more intense competition from other community banks and other financial service providers than do small banks.

  • Large banks are feeling more competition from brokers and securities dealers; many respondents also see mutual funds as competitors for consumers' deposits.

  • Loans from mortgage companies, lending subsidiaries of auto and machinery dealers, and farm credit banks are seen as viable competition for community banks.

Products and services: The greater competition facing large community banks undoubtedly contributes to their more extensive product and service offerings.

  • Current products and services. Large banks surpass small banks in offering technically advanced products like ATMs, debit cards and bank-by-phone service. Very few community banks, regardless of size, offer financial planning. Few community banks have yet to offer services via either the Internet or personal computers.

  • Future products and services. Over 60 percent of large banks see themselves offering bank services via personal computers and around 40 percent plan to market on the Internet and to offer financial planning over the next five years.

Common issues: Although competitive pressures and product and service offerings differ among community banks, they perceive many of the issues confronting them similarly.

  • Community banks of all sizes see employing technology as a formidable task during the next five years.

  • Over 60 percent of banks, regardless of size, consider deposit growth and credit quality to be major challenges.

  • Large and small community banks have the same legislative agenda. In terms of importance, removing credit unions' tax exemption exceeds four times the other legislative objectives enumerated in the survey.

Community prospects: One factor in district community banks' favor as they deal with new technologies and competitors is an expectation of the district's continued prosperity.

  • Around 60 percent of respondents feel good about the economic prospects for their communities.

  • Plus another 32 percent of large community banks regard their community prospects as excellent vs. 10 percent of the small community banks.

Bank prospects: To meet the challenges ahead, more large community banks expect to expand by acquisition than small community banks.

  • 44 percent of large community bank respondents see themselves acquiring other community banks during the next five years, against 28 percent of small banks holding that view.

  • While many community bankers see themselves buying other community banks, very few respondents plan to sell their banks to another community bank or large banking organization.

Facts about the survey and respondents
In May, the Minneapolis Fed surveyed 750 Ninth District banks with assets less than $150 million and which are not part of a banking organization with assets in excess of $150 million; 344 banks, or 46 percent, responded. For this analysis, community banks were classified by size. Small community banks are those whose assets total less than $25 million, medium banks with assets between $25 million and $49.99 million, and large community banks are those with assets between $50 million and $150 million.