Rural banks do less farm and business lending after they have been acquired by out-of-state holding companies, a Kansas City Fed study concludes.
The loan portfolios were examined at the 385 rural banks sold in the Federal Reserve's Tenth District. The study looked at 112 rural banks that were bought by out-of-state holding companies since 1986 and remained separately chartered banks.
It found dropoffs in farm and, especially, business lending after acquisition, and these types of lending remained lower even years after the deals.
The finding, though tentative, lends credence to the criticism of rapid bank consolidation by those who argue that the massing of the country's banks is curtailing rural loan availability.
On the other hand, it means that the usual loan runoff to surviving community banks after an acquisition is sometimes permanent in small towns - and could mean a bigger book of business for those independents that remain.
"This study and others like it point to one big conclusion," said William R. Keeton, senior economist at the Kansas City Fed and author of the study. "Bank mergers do offer real competitive opportunities for independent banks in rural communities."
Mr. Keeton doesn't argue that there is less farm or small business lending in rural communities. He contends only that rural banks bought by out-of-state holding companies do less of it.
And he stressed that only a certain kind of merger - those in which a rural bank is bought by a large, out-of-state interest - has the effect of reducing rural lending. Mergers in which banks were bought by other rural banks did not produce a subsequent decrease.
He cautioned that many variables, and not just the mergers themselves, could affect the lending numbers he used.
"People don't like change," said Phil Burns, president of Farmers and Merchants National Bank, West Point, Neb. "Farmers see a change in control of the bank, and you bet they'll look for alternatives."
The district includes Colorado, New Mexico, Wyoming, Oklahoma, Kansas, Nebraska, and Missouri. Rural bankers in parts of the region that have seen bank mergers say the findings confirm what they already knew.
"From where I'm sitting in Colby, Kans., you bet it's true," said Jon Pope, president of $18 million-asset Peoples State Bank. "One local bank was bought by Bank IV, which was bought by Boatmen's, which is now being bought by NationsBank. To say that their farm loan portfolio and lending volume have decreased is putting it mildly."
Mr. Pope said two local competitors were bought by banking companies from other parts of the state in the last two years. Both have taken dramatic turns in their farm-lending strategies, he said, posing long-term implications for him.
First, the competitors are now cherry-picking, concentrating on winning the largest, most profitable agriculture businesses by competing on rates he can't match. "They offer 8.5% on accounts that I never could," he said.
Second, the new competitors are letting the government-guaranteed portions of their farm portfolios run off. Such customers often require more work, and the efficiency equations don't add up for large organizations.
"We're talking lots of paper work here," Mr. Pope said. "You've got to know the borrowers. They're small, mostly mom-and-pop operations that need the help. In many cases, these are borrowers that will be in sometimes problem debt situations for 20 or 30 years."
He says he doesn't mind the new competitors' change in direction, because they're letting go of business that he's happy to pick up.
But in the long term, he's concerned that more of these small farmers will become greater risks as the federal farm safety net is gradually removed. Thus, the risks will increase for the small, independent banks they turn to.
"It's scary," he said. "I see the way the ag economy is headed - what with 10% of the farmers controlling 90% of the farmland and 10% of the banks controlling 90% of banking - and I see a possible disaster for small banks."
