What does the future hold for community banks?

Ninth District Community Banking Poll Summary

David Fettig | Editor

Published July 1, 1996  | July 1996 issue

During the first half of the 1990s, the Ninth District lost 223 community banks, a 20 percent decline; community banks are those with below $150 million in assets. And according to 400 community bankers who responded to a May fedgazette poll, that trend will continue through the year 2000 — mainly because about a third of the respondents plan to acquire other community banks. Banks plan to meet competition in the coming years by offering more technology-based products—especially phone banking and debit cards, with more than one-third planning to introduce computerized home banking.

Competition: A variety of financial firms are intensely competing with community banks for business.

  • Other community banks rank high among community banks' most intense competitors; credit unions, which are similar to community banks, also score high.

  • Brokerage firms and mutual funds compete vigorously for bank deposits.

  • Farm credit banks and lending subsidiaries of machinery and auto companies contest community banks for loans.

  • Large regional banks rank low on the list of intense competitors.

Products and Services: To remain competitive, community banks see the need to offer technology-based services to their customers.

  • If respondents stick to plans to offer these services, over 80 percent will be offering ATMs, debit cards and bank by phone service within five years.

  • Many community banks also plan to diversify the services they offer and increase fee income; somewhat more than half indicate they will be selling mutual funds and insurance and offering financial planning within five years.

  • Moreover, roughly one-third of respondents see a role for personal computers in their banks' services; 27 percent could have a homepage on the Internet and 37 percent will offer home banking within five years.

Regulation: Putting credit unions on equal footing with banks is the respondents' major regulatory concern.

  • Consistent with the competitive threat from credit unions that community banks perceive, 91 percent of respondents believe removing credit unions' tax-exempt status and making them comply with bank rules and regulations are very important issues.

  • To effectively compete with their other nonbank rivals, 76 percent of respondents feel meaningful regulatory relief is very important.

  • But not nearly as high on community banks' wish list is an expansion in bank powers; fewer than 15 percent of respondents consider expansion of banks' securities and insurance powers, and permitting real estate brokerage and sales as very important.

Bank Prospects: Expanding is one strategy many community banks favor for dealing with pending change, which suggests that the number of Ninth District community banks will continue to decline.

  • 36 percent of respondents indicate that their banks will acquire other community banks within the next five years. Assuming this number is representative of all communities, the number of district community banks could drop in the next five years by as much as — or maybe more than — in the early '90s, when over 200 banks were lost.

  • While many district community bankers want to buy banks, only 6 percent plan to sell.

  • Just 3 percent expect their bank to be purchased by a large banking organization.

  • A majority of community banks, however, do not plan any change in ownership.

Significant Issues: Community banks will continue to focus on traditional banking functions, but they will also place strong emphasis on technology-enhanced services.

  • Traditional banking functions are bankers' top challenges: 74 percent of respondents view maintaining credit quality as very significant and 69 percent view deposit growth similarly.

  • But technological advances are changing how those bank functions are performed, so 71 percent of respondents see the employment of technology as a very significant issue within the next five years.

  • Forty-six percent of respondents see increasing fee income as very significant and 35 percent term diversity of financial products as very significant.

  • Fifty-one percent of respondents look at remaining independent as very significant.

Community Prospects: While community banks are coping with these issues, they should receive a boost from their generally positive outlook for their communities.

  • 22 percent of respondents view the prospects for their communities as excellent during the next five years.

  • 54 percent feel good about their towns' prospects.

  • 23 percent indicate their communities' prospects are fair.

  • Only 1 percent consider their communities' prospects as poor.

Related to the poll:

July 1997 Banking Poll

what-does-the-future-hold-for-community-banks (xls)