WASHINGTON Going to where your customers are is a pretty straightforward concept. But a new Federal Deposit Insurance Corp. report released Monday turns that adage on its head, suggesting that some community banks in areas with a declining customer base weathered the financial downturn better than banks in metropolitan regions.
The study, which continues the FDIC's focus on community banking issues, charts trends for institutions in depopulating rural areas. The agency last studied the effects of rural depopulation in 2004.
The main takeaway is that while the U.S. continues to experience depopulation in its rural counties, and depopulation is accelerating in some areas, many rural community banks took advantage of agricultural growth during the recession to outperform community banks in areas where population was rising. The paper also identified signs suggesting an easing of depopulation in some areas, including the emergence of energy extraction in parts of the Great Plains and Appalachia-East regions.
"The finding is that in recent years, the loan mix of banks in rural depopulating areas has helped to insulate them from the worst effects of the recent financial crisis and recession, and although these banks still find it challenging to grow their balance sheets, community banks in depopulating rural areas have actually fared better, on average, than banks in metro areas," the report said.
As depopulation has accelerated, the paper said, the challenge for rural banks to expand their balance sheets has remained. But, somewhat unusually, asset growth for these banks grew starting in 2006 thanks to the strengthening agricultural sector, while growth was weaker for banks in other areas.
"As a result, from 2006 through 2012 community banks in depopulating rural areas posted higher asset growth rates than community banks elsewhere," the report said. "Asset growth was accompanied by strong deposit growth, since farmers looked to place their high earnings into their local institutions."
The study pointed to numerous examples in which community banks in depopulating rural counties actually performed better during the recession than community banks in areas with rising populations.
For example, the report said community banks based in metropolitan areas earned a percentage point less per year between 2006 and 2010 than they had in the previous five-year period, while also experiencing a sharp rise in loss provisions and noncurrent loans. While community banks in growing areas "fared somewhat better," they too fared poorly during those five years relative to the earlier period.
By comparison, the return on assets for community banks in rural depopulating areas declined only modestly, the FDIC said. "Of all community banks, between 2006 and 2010 those in depopulating rural areas also reported the lowest increases in provision expenses and in levels of noncurrent loans," the report said. "This trend continued in 2011 and 2012."
The FDIC said there is a "simple" explanation for the trend. Banks operating in metro areas had greater holdings of commercial real estate and construction and development loans, which deteriorated sharply in the downturn. But the continued focus of rural banks in depopulating areas on agricultural lending and not CRE loans "translated directly into lower loan losses during the recession."
"Since 2006, much of the disparity in performance between community banks located in depopulating rural areas and those located in metro areas can be explained by the differences in the loan mix of the two groups," the study said.
Moreover, it paid off for community banks headquartered in a depopulating rural area to stay put, rather than to expand their branch network into metropolitan areas. Before the downturn, some rural institutions sought to counter declines in their customer base by expanding into faster-growing regions. While their growth rates improved, the expansion tended to include a shift in lending strategy toward more holdings of CRE and C&D loans.
"As a result, when the U.S. economy went into recession and the quality of many CRE and C&D loans was adversely affected, rural community banks with metro branches reported asset quality and earnings performance that was more in line with that of metro banks than with that of other rural banks," the study said.
The report added that while depopulation is among the factors driving bank consolidation in rural areas, consolidation has accelerated slightly more in higher-population areas. Between 1984 and 2012, community bank charters declined by 60% in metropolitan areas, and by 58% in micropolitan areas. That figure was 54% for depopulating rural areas.
Still, the FDIC noted, "Continued depopulation raises the possibility that consolidation rates may increase in rural depopulating areas.
"Depopulation can make it more challenging to staff and manage bank branches and back-office facilities," the study said.
"Moreover, many small banks in rural areas are owned and operated by one or two key people, and the children of these executives, who perhaps would have been the successors to management, often move away to pursue opportunities in larger towns and cities. In such cases, if there are neither clear options within the institution for succession nor viable professional candidates within the community, successorship may become a concern."
Meanwhile, energy exploration appears to hold some promise for banks with declining customer bases, the FDIC said. The agency pointed specifically to extraction of shale oil and natural gas in sections of the depopulating Great Plains and Appalachia-East regions, which "requires significant manpower." But the effects of those trends on depopulation are limited.
"The positive trends found in energy extraction and other developments do provide some optimism for rural areas, but the likelihood of a large-scale reversal in rural depopulation trends seems remote," the FDIC said. "The population outflows are well entrenched and in many areas date back a century or more."