For release on delivery
9:15 a.m. EDT (8:15 a.m. CDT)
October 4, 2018
Trends in Urban and Rural Community Banks
Remarks by
Randal K. Quarles
Vice Chairman for Supervision
Board of Governors of the Federal Reserve System
at
"Community Banking in the 21st Century"
Sixth Annual Community Banking Research and Policy Conference, sponsored by
the Federal Reserve System, the Conference of State Bank Supervisors,
and the Federal Deposit Insurance Corporation
St. Louis, Missouri
October 4, 2018
Good morning. I want to thank the conference organizers for inviting me to speak
to you today.1 It is an honor and a pleasure to be part of this unique annual event that
brings together bankers, bank supervisors, and researchers to discuss the latest
community banking research, recent trends in community banking practices, and policy
issues that are on the minds of conference attendees.
I want to start, first, by conveying my own perspective on the importance of
community banks. Community banks have a long history of providing essential financial
services to households, small businesses, and small farms in communities across the
United States. Their ability to effectively provide these services speaks to the strength of
the community banking business model--that is, establishing and maintaining local
relationships, and offering customers a face-to-face interaction with a local banker.
And it is something I have observed firsthand, especially for community banks in
rural communities. Growing up in rural Colorado and Utah, I saw the importance of
community bankers having local knowledge and being personally invested in the same
communities that they serve. That local knowledge, and the relationship-based lending
that is the hallmark of community banking, can stem losses during downturns, as
community banks may be able to work with borrowers to avoid losses. Indeed, research
has shown that small business lending at small banks declined less severely than at large
banks during the last recession.2 At the same time, I have seen the challenges that many
- 2 -
community banks face. I want to be careful not to overstate those challenges--to
paraphrase Mark Twain, the reports of your demise are greatly exaggerated--and I believe
that the community bank model has many advantages and will continue to play an
integral role in our financial system.
These sorts of dynamics are one reason that community banks are an important
topic for research. As you probably know, this is the sixth annual community banking
conference cosponsored by the Federal Reserve and the Conference of State Bank
Supervisors (CSBS), and it is the first conference for which the Federal Deposit
Insurance Corporation is joining as a cosponsor. The organizers of the inaugural
conference decided that, rather than holding a traditional academic-style conference, they
would invite bankers and bank supervisors to hear what the researchers had to say and to
share their real-world experience with the researchers. The hope was that these
interactions would prove beneficial to all three groups. The positive feedback that we
have received from conference attendees over the past five years strongly supports the
wisdom of the organizers' decision.
Over time, the conference has evolved, with some new features introduced each
year. The Case Study Competition, which is sponsored by the CSBS, introduces
undergraduates to community banking and some of the challenges that community
bankers face. The Emerging Scholars Program was also added to the conference a few
years ago. This program is intended to support Ph.D. students who are considering or
working on a dissertation on a banking-related topic and encourage them to develop a
research agenda that focuses on community banking issues. I would like to congratulate
- 3 -
this year's winning case study team, Eastern Kentucky University, and emerging
scholars, Jiayi Xu, Cao Fang, and Flora Ma.
Not All Community Banks Are the Same
Turning to the topic of today's speech, it occurs to me that we often speak of
community banks as though they are all pretty much the same. But, in reality, there is
considerable heterogeneity within the group of firms that are commonly considered to be
community banks.3 One important dimension of diversity is size, which can range
anywhere from less than $100 million in assets to around $10 billion in assets. As noted
by Chairman Powell when he spoke at this conference two years ago, looking at
community banks as a monolithic group masks some important differences between the
smallest and largest community banking organizations.4 For example, essentially all of
the decline in the number of community banking organizations over the past two decades
has taken place among those with assets less than $100 million. And these smallest
banking organizations have consistently had a lower average rate of return on assets than
their larger peers.
3
For the purpose of my remarks today, "community bank" means a bank or thrift with less than $10 billion
in assets (in constant 2005 dollars). I exclude from this definition any bank or thrift that has less than
$10 billion in assets but is part of a larger organization with more than $10 billion in total banking assets.
"Urban community bank" is one that derives more than half of its deposits from offices located in one or
more metropolitan statistical areas, and "rural community bank" derives at least half of its deposits from
nonmetro areas. Using the more nuanced Federal Deposit Insurance Corporation (FDIC) definition of a
community bank, which takes into account both size and activities, would have very little effect on the
trends that I will be discussing. The FDIC definition can be found in Federal Deposit Insurance
FDIC Community Banking Study
Corporation (2012), "Defining the Community Bank," in (Washington:
FDIC, December), https://www.fdic.gov/regulations/resources/cbi/report/CBSI-1.pdf.
4
See Jerome H. Powell (2016), "Trends in Community Bank Performance over the Past 20 Years," speech
delivered at "Community Banking in the 21st Century," Fourth Annual Community Banking Research and
Policy Conference, sponsored by the Federal Reserve System and the Conference of State Bank
Supervisors, St. Louis, Mo., September 29,
https://www.federalreserve.gov/newsevents/speech/powell20160929a.htm.
- 4 -
Another significant aspect of diversity among community banks is the type of
market served--urban versus rural. These two types of areas differ in many respects,
including the age distribution of the population, the share of the population with a college
degree, homeownership rates, poverty rates, and the share of the population with internet
access.5 And while the national population has been growing over the past 20 to
30 years, many rural areas have experienced population declines, and the share of the
population living in rural areas has been falling.6 Furthermore, since 2008, most job
growth in the United States has occurred in urban areas.7
Given these differing circumstances, it is not surprising that community banks
operating in rural and urban areas tend to face different challenges. For example, the
number of competitors faced by a banking organization tends to be larger in urban
banking markets than in rural markets, while hiring and retaining high-quality employees
can be more difficult in rural areas. And some observers have expressed concern about
the implications of bank consolidation over the past two or three decades for access to
banking services in rural areas while also wondering about the future viability of rural
community banks.
5
See U.S. Census Bureau (2016), "New Census Data Show Differences between Urban and Rural
Populations," press release, December 8,
https://www.census.gov/newsroom/press-releases/2016/cb16210.html.
6
See Kim Parker, Juliana Menasce Horowitz, Anna Brown, Richard Fry, D'Vera Cohn, and Ruth Igielnik
(2018), "Demographic and Economic Trends in Urban, Suburban and Rural Communities," in What Unites
and Divides Urban, Suburban and Rural Communities (Washington: Pew Research Center, May),
http://www.pewsocialtrends.org/2018/05/22/demographic-and-economic-trends-in-urban-suburban-andrural-communities; or John M. Anderlik and Richard D. Cofer, Jr. (2014), "Long-Term Trends in Rural
Depopulation and Their Implications for Community Banks," FDIC Quarterly, vol. 8 (2), pp. 44-59,
https://www.fdic.gov/bank/analytical/quarterly/2014-vol8-2/article2.pdf.
7
See Mark Muro and Jacob Whiton (2018), "Geographic Gaps Are Widening While U.S. Economic
The Avenue
Growth Increases," Brookings Institution, (blog), January 23,
https://www.brookings.edu/blog/the-avenue/2018/01/22/uneven-growth; and Brian Thiede, Lillie Greiman,
Stephan Weiler, Steven C. Beda, and Tessa Conroy (2017), "The Divide between Rural and Urban
America, in 6 Charts," U.S. News & World Report, March 20,
https://www.usnews.com/news/nationalnews/articles/2017-03-20/6-charts-that-illustrate-the-divide-between-rural-and-urban-america.
- 5 -
The number of community banks has been declining over the last 20 years, but
community banks still account for more than 95 percent of banks operating in the United
States. The decline has been roughly similar for urban and rural community banks,
leaving the share of community banks that operate primarily in rural markets quite stable
at just over 50 percent. While urban community banks are quite a bit larger than rural
community banks on average, over the last 20 years, rural community banks have
consistently earned higher rates of return on assets and rates of return on equity than their
urban peers despite a more challenging economic environment.
While the data present a compelling high-level picture, they do not tell the whole
story. For example, averages across a large number of markets do not tell us what is
going on in any individual market. In addition, much of the data that I am presenting
today is aggregated to the county level, which obscures community-level dynamics:
Some communities within a county may have lost banks or bank branches, while others
may have gained. In the rural Mountain West, where I grew up, a single county can be
physically larger than some Eastern states. And the demographics of the communities--
for example, high- or low-income--that have lost or gained are also not visible, but
important. Federal Reserve staff are engaged in efforts to further our understanding of
the effects of losses of banks or bank branches on the people who live and work in the
affected communities.
National Trends in Urban versus Rural Community Banks over the Past 20 Years
The number of banks in the United States fell by almost half over the past
20 years--from about 10,700 in 1997 to about 5,600 in 2017. About 97 percent of the
decrease was accounted for by community banks. Looking at the trend in the number of
- 6 -
urban and rural community banks (figure 1), we see that the number of banks in both of
these categories has been falling over time. The rate of decline was steeper for rural
banks than for urban banks before the financial crisis but has reversed in the post-crisis
period. This reversal may be due to the fact that, as we will see momentarily, urban
community banks suffered more severe losses in the immediate post-crisis period than
did rural community banks. And the share of community banks that operate primarily in
rural markets has increased slightly, from 53 percent to 54 percent.
While there are more rural community banks than urban community banks, the
latter consistently account for a larger volume of deposits, loans, and offices than the
former. This difference is due, in part, to the average size of an urban community bank,
in terms of total assets, being about two and a half to three and a half times that of the
average rural community bank (figure 2). As community banks have increased in asset
size, they have also grown their branch networks. The average number of branches for
an urban bank is about 1.7 to 2 times that of a rural bank (figure 3).
Looking next at the total amount of deposits held by all urban community banks
and all rural community banks, we can see that both have been trending upward over time
(figure 4). Growth in total loans outstanding was strong for both urban and rural
community banks between 1997 and 2008 (figure 5). Declines in lending between 2008
and 2011 were more severe for urban community banks than rural ones. Coming out of
the recent recessions, rural community banks have seen quite modest loan growth since
2011, while the pace of growth in urban community bank lending has been strong since
2013. This divergence in recent growth rates may be due to the fact that the recovery
- 7 -
from the recent recession has been much more robust in urban areas than in rural areas of
the country.
When it comes to performance measures, rural community banks consistently
outperform urban community banks with regard to return on assets (figure 6) and return
on equity (figure 7). This difference was particularly pronounced during the financial
crisis, when profitability fell much more sharply at urban community banks than at rural
community banks. Looking at charge-off rates (figure 8), we see that they have been
quite similar for the two types of community banks over most of the past 20 years, except
for the period from 2008 to 2013, when rural community banks had lower charge-off
rates than urban community banks.
This data suggest that, despite facing a more challenging economic environment,
rural community banks appear to be holding their own relative to urban community
banks.
Market-Level Trends for All Banks and Community Banks
Now I would like to shift my focus from the banks themselves to the communities
they serve by exploring whether access to banking services--provided by community or
larger banks--has been declining in urban or rural areas of the country. As of 2017, the
average urban market was home to 18 community banks and just over 8 large banks,
which represents a change from 21 community banks and 6 large banks in 1997
(figure 9). The average number of community banks per rural market has been
remarkably stable over the past 20 years at right around 4, while the average number of
large banks per rural market has increased from just under 1 to 1.4 (figure 10). These
- 8 -
statistics indicate that, perhaps surprisingly, the average number of banks in rural markets
has actually increased in the past 20 years.
If we look at the number of bank branches rather than the number of competitors,
we see a significant increase in the number of branches in the average urban market, with
the entire increase coming from branches of large banks (figure 11). Over the same
period, there was essentially no change in the number of branches in rural markets, with a
slight shift upward in the share of branches accounted for by large banks (figure 12). Of
course, there is substantial variation in the experiences of individual markets, as some
local rural and urban markets gained and others lost bank branches.
As the share of branches in the average banking market operated by community
banks has declined, so, too, has the share of deposits held at community banks. This shift
in deposit shares away from community banks, similar to the shift in branch shares, has
been substantial in urban markets but only marginal in rural markets (figure 13).
Community banks held almost half of all deposits at urban bank branches in 1997, but
just over one-third in 2017. In rural markets, community banks collectively had a deposit
market share of 80 percent in 1997, declining moderately to 77 percent in 2017.
Despite the decline in the overall share of deposits held by community banks in
urban and rural markets over the past 20 years, the average individual community bank
operating in each type of market has seen almost no change in its deposit market share
(figure 14). In other words, the decline in the share of market deposits held in aggregate
by community banks is due to fewer community banks. The fact that the average
individual community bank has maintained or increased its deposit market share since
- 9 -
2008 suggests that community banks have been able to compete quite successfully with
larger banks in both urban and rural markets during and since the recent recession.
Head Offices
As I have mentioned, the average numbers of banks and bank branches have
increased or remained constant in rural markets in recent years despite a wave of mergers
that has greatly reduced the number of U.S. banking organizations. Industry
consolidation has led to fewer banks but maintained most of the branches of the acquired
banks. In addition, most mergers and acquisitions have involved expansion into new
markets by the acquiring bank rather than acquisitions of local competitors, which has
allowed local communities to continue to enjoy a variety of potential providers of
banking services despite the industry consolidation.8
One unavoidable aspect of consolidation is a loss in the number of bank
headquarters offices. The number of bank headquarters located in urban markets has
fallen by half over the past 20 years, while the number in rural markets has fallen by
45 percent.9 Consolidation has led to a doubling in the number of banking markets--
almost all of which are rural--in which no banks are headquartered (figure 16). We hear
anecdotally that banks are more attuned to the needs of the communities in which they
are headquartered, so the significance of this loss could have an effect on the local
markets.
Qualitative Evidence at a More Micro Level
As I previewed at the beginning of my remarks, data and averages often do not
tell the whole story. At the end of the day, we care about bank branch locations because
we care about the people and communities that they are serving or, in some cases, not
serving adequately. So even if the data tell us that most rural markets are well served, we
need to focus our attention on those markets that may not be as well served and how that
is affecting the people who bank, or cannot bank, there. That is why the Federal Reserve
System's Community Development function has undertaken a national series of listening
sessions to assess the real effects of bank closures on rural communities. Reserve Bank
staff members are conducting the sessions around the country to gather information from
consumers and small business owners in rural communities that have been directly
affected by bank closures.
To identify where to conduct these sessions, we used data to identify rural towns
that have experienced bank branch closures; in some cases, these towns lost the only
bank in town and now have no remaining banks. Then we convened local residents and
small business owners to ask them about what the loss of a bank meant to them and their
community.
For some residents, the closure has not been much of a problem. Most, if not all,
of the listening session participants in Clark, South Dakota, noted that they do most of
their routine banking online. Some in Clark even noted that they did not think ATMs
(automated teller machines) were necessary, as most of the retail businesses in town offer
cash back with debit card purchases. Nonetheless, residents of Clark spoke positively
about the importance of the personal touch a local bank can provide. Residents liked
familiar faces at the teller window and loan officers who understand the local economy
when making small business loan decisions.
However, online banking is not necessarily an opportunity for everyone. Indeed,
even for community banks themselves, technology may be perceived as a threat or an
opportunity, depending for example on whether the necessary infrastructure is available.
In Nicholas County, Kentucky, which is located in Appalachia, many residents do not
have access to high-speed internet; this lack of access has led most residents to travel
outside of the county to conduct their banking needs. This situation is certainly not
optimal for anyone, but it presents a particular challenge to the elderly, those without a
car, and busy small business owners who do not have time to travel 25 miles each way to
make change and deposit checks. In Centre County, Pennsylvania, we heard that the
transportation challenge is particularly acute for the Amish--10 miles is a long way to
travel by horse and buggy.
The loss of a bank branch also has a ripple effect on a community as a whole. In
the village of Brushton, New York, which lost its only bank branch in 2014, small
business owners commented that when residents must leave the village to access banking
services, they are more likely to shop, eat, and pay for services in other towns, which
creates additional hardship for the small businesses of Brushton. Additionally, as the
ability of community members to access cash has decreased, credit card use has
increased. Small business owners in Brushton say that this growth in credit card usage
has significantly increased the cost of doing business.
Lastly, one theme that we heard loud and clear across the country was that the
loss of a local bank meant the loss of an important civic institution. Banks do not just
cash checks and make loans--they also place ads in small town newspapers, donate to
local nonprofits, and sponsor local Little League teams. As towns lose banks and
bankers, they also lose important local leaders.
We will continue to conduct these listening sessions across the country
throughout the fall. In fact, one of these listening sessions will take place next week just
two hours down the road in Reynolds County, Missouri. We look forward to sharing the
collective results of our efforts in a report that should be published in early 2019.
Conclusion
To sum up, the numbers of urban and rural community banks have been declining
over the past 20 years, but community banks continue to play an important role in both
types of markets. Urban and rural community banks face different challenges, but, on
average, both seem to be faring well in the post-crisis period. And the average rural
banking market has not seen any decline in the number of banks or bank branches over
recent years. For the local areas where the availability of banking services has declined,
we are in the process of assessing the effects of this decline on the people who live and
work in those communities. I look forward to continuing to engage in this area and
monitor the developments in this most vital part of the banking ecosystem.
2015
2013
the
Supervision.
Banks
with
Thrift
2011
filed of
Office
Income
the
Urban
2009
and
with
Community
filed
Condition
of of
2007 Rural
Year
Reports
Reports
Financial
Total
bank
2005
Thrift
Number
using
and
1:
2003
Council
calculations
staff
Figure
2001
Board
Examination
Reserve
stitutions
2015
2013
Banks
Supervision.
the
2011
Thrift
with
of
filed
Office
2009 the
Income
Community
with
and
Urban
of
filed
2007
Year
Condition
Reports
of
Size
Rural
Reports
Financial
2005
bank
Thrift
and
Average
using
2003
2:
Council
calculations
staff
2001
Examination
Figure
dollars.
Board
2005
tutions
rve
2015
Bank
2013
the
Supervision.
Community
2011
with
Thrift
of
filed
per
Office
2009 Income
the
and
Urban
with
Offices
filed
2007
Condition
Year
of
of
Reports
Rural
Reports
2005
Financial
bank
Number
Thrift
using
and
2003
Council
calculations
Average
staff
2001
3:
Board
Examination
ve
ns
re
2015
2013
Banks
the
Supervision.
with
2011
Thrift
filed of
Office
Income
the
2009
Community
and
with
Urban
at
filed
Condition
2007
of
Year
Reports
Rural
Reports
Financial
Deposits
2005
bank
Thrift
using
and
Total
2003
4:
Council
calculations
staff
2001
Board Examination
Figure
eserve tutions
2015
2013
Banks
the
Supervision.
with
2011
Thrift
filed of
Office
Income
the
2009
and
Community with
Urban
filed
at
Condition
2007
of
Year
Reports
Rural
Reports
Loans
Financial
2005
bank
Thrift
using
Total
and
5: 2003
Council
calculations
staff
2001
Figure
Board Examination
eserve tutions
2015
Assets
2013
on
the
Supervision.
with
Thrift
2011
filed of
Return
Office
Income
the
2009
and
Bank
with
Urban
filed
Condition
of
2007
Year
Reports
Rural
Reports
Financial
bank
2005
Community
Thrift
using
and
2003
Council
calculations
Average
staff
6:
2001
Board Examination
Reserve
stitutions
999
Figure
2015
Equity
2013
on
the
Supervision.
with
2011
Thrift
filed of
Return
Office
Income
the
2009
and
Bank
with
Urban
filed
Condition
2007 of
Year
Reports
Rural
Reports
Financial
2005
bank
Community
Thrift
using
and
2003
Council
calculations
Average
staff
7:
2001
Board
Examination
itutions
99
Reserve
Figure
2015
Ratio
2013
the
Supervision.
with
2011
Thrift
filed of
Charge-off
Office
Income
the
2009
and
Bank
with
Urban
filed
Condition
2007
of
Year
Reports
Rural
Reports
Financial
2005
bank
Community
Thrift
using
and
2003
Council
calculations
Average
staff
8:
2001
Board
Examination
itutions
igure
99
Reserve
2015
Markets
2013
banks
the
Urban
2011
Supervision,
with
in
Large
filed
Thrift
of
2009
Income
Office
and
Banks
banks
the
of with
2007
Year Condition
filed
of
Corporation.
Reports
Reports
Community
2005
Number
bank
Financial
Insurance
using
Thrift
Deposit
banks
2003
Council,
All
Average
calculations
Federal
9: the
staff
2001
with
Examination
Board
filed
ns
ve
gure
2015
Markets
2013
banks
Rural
the
2011
in
Supervision,
with
Large
filed
Thrift
of
2009
Income
Banks
Office
banks and
the
of
with
2007
Year
Condition
filed
of
Corporation.
Reports
Reports
Number Community
2005
bank
Financial
Insurance
using
Thrift
banks
Deposit
2003
Average
All
Council,
calculations
Federal
10: the
staff
2001
with
Examination
Board
ed
ure
s
2015
Markets
2013
Urban
banks
in
the
2011
Supervision,
with
Large
filed
Thrift
of
Offices
Income
2009
Office
and
the
banks
with
Bank
2007 Condition
filed
Year
of
of
Corporation.
Reports
Reports
Community
2005
bank
Financial
Insurance
Number
using
Thrift
Deposit
2003 banks
Council,
All
calculations
Federal
the
staff
Average
2001
with
Examination
Board
11: filed
ions
ts
erve
9
e
2015
Markets
2013
Rural
banks
in
the
2011
Supervision,
with
Large
filed
Thrift
of
Offices
2009
Income
Office
and
banks
the
Bank
with
2007
Year Condition
filed
of
of
Corporation.
Reports
Reports
Community
2005
bank
Financial
Insurance
Number
using
Thrift
Deposit
banks
2003
Council,
All
calculations
Federal
Average
the
staff
2001
with
Examination
Board
12:
filed
ns
ve
e
Banks
2015
2013
Community
by
the
2011
Supervision,
with
filed
Thrift
Held
of
2009
Income
Office
and
the
Urban
with
Deposits 2007
Condition
filed
Year
of
Rural
Corporation.
Reports
Reports
2005
Market
bank
Financial
Insurance
of
using
Thrift
Deposit
2003
Council,
calculations
Federal
Share
the
staff
2001
with
Examination
Board
filed
erage
rve ons s
2015
Bank
2013
the
2011
Supervision,
with
filed
Thrift
Community
of
Income
2009
per
Office
and
the
Urban
with
Condition
filed
2007
Share Year
of
Rural
Corporation.
Reports
Reports
2005
bank
Market
Financial
Insurance
using
Thrift
Deposit
2003
Council,
calculations
Federal
Average
the
staff
2001
with
14:
Examination
Board
filed
tions its
erve
9
Fig
Markets
2015
Urban
2013
and
the
2011
Rural
Supervision,
with
in
filed
Thrift
of
2009
Income
Office
and
the
Urban
with
2007
Condition
Year filed
of
Rural
Headquarters
Corporation.
Reports
Reports
of 2005
bank
Financial
Insurance
using
Thrift
Deposit
2003
Number
Council,
calculations
Federal
the
staff
2001
with
Examination
Board
filed
ve
ons
Average
2015
2013
Headquarters
the
Supervision,
with
filed
Thrift
2011
Zero
of
Income
Office
with
and
2009 the
with
Condition
filed
Year
of
2007
Markets
Corporation.
Reports
Reports
of
2005
bank
Financial
Insurance
using
Thrift
Deposit
2003
Number
Council,
calculations
Federal
the
staff
2001
16:
with
Examination
Board
filed
ions
ts
999
erve
gure