and a slowing of mortgage re - financings - and their associated buildup in deposits - core deposits have weakened. history suggests that, as the economy strengthens further, deposit substitutes again will become more attractive to bank customers, requiring competitive responses in bank deposit offering rates and reliance on non - core sources. community bankers in the last half of the nineties demonstrated their skill in competing successfully in such markets. although their deposit patterns have been similar, community and larger banks have seen some interesting differences developing in their portfolios in the past two or three years that are worth noting. banking commentary generally has emphasized the extent to which residential mortgage finance and consumer credit extensions have dominated the portfolio expansion of the banking industry. in fact, that growth, which dominates the aggregate statistics, has been mainly a large bank phenomenon. at community banks, the residential mortgage, credit card, and consumer installment loan portfolios have declined in each of the last three years. to be sure, this change may be a matter of choice. the data suggest, for example, that community banks have originated a significant volume of mortgage loans for securitization by others, continuing to acquire in the process a large amount of mortgagebacked securities. but some observers have noted that in the market for new originations of mortgages community banks are also under continued competitive pressure from mortgage bankers, nationwide mortgage lenders, and real estate agent relationships with out - of - market lenders, often through the internet. the declining importance of traditional consumer credit business at community banks appears to stem from both sustained competition from captive finance companies and community banks ’ withdrawal from the credit card market, where significant scale is required to service the resultant portfolios. community bankers, however, continue to have success with home equity loans as a substitute for more traditional consumer lending and have experienced growth in such loans comparable to that at larger institutions. particularly noteworthy is the longer - term trend at community banks that seems to have accelerated in the past three years - the increasing share of asset growth accounted for by nonresidential real estate finance, particularly construction and land development loans and commercial and industrial real estate financing. last year these categories accounted for more than 90 percent of the net asset growth of banks with less than $ 1 billion in assets ; multifamily real estate and farmland finance would bring the total to more than 100 percent, offsetting the declines in other categories. such credit exposures are a natural evolution of community banking and are quite profitable, helping to sustain both

alan greenspan : banking remarks by mr alan greenspan, chairman of the board of governors of the us federal reserve system, before the independent community bankers of america convention, san diego ( via satellite ), 17 march 2004. * * * it is a pleasure once again to participate in the annual meeting of the independent community bankers association. i particularly hoped to attend this meeting in person, but events made such a trip infeasible. i wanted to be at your meeting to join in honoring the contributions of ken guenther. as everyone knows who has ever received ken ’ s notes - known fondly to one and all as “ guenther - grams ” - he thinks deeply and broadly about banking and financial matters. having reflected on the kinds of issues that ken has on his mind, i thought it would be fitting today if i shared with you some ideas about where the banking industry is today and about a few trends we see evolving. asset growth and quality the weakness in credit quality that accompanied the recent recession has clearly been mild for the banking system as a whole, and the system remains strong and well positioned to meet customer needs for credit and other financial services. during the past three years or so, the industry extended its string of high and often record quarterly earnings, retained its historically high equity and risk - based capital ratios, and generally enjoyed robust asset growth. the industry and its supervisors had begun exceptionally early to address slippage in credit standards that accompanied the maturing of the last expansion, and their timely intervention was reflected in modest subsequent write - offs relative to earnings. indeed, for each of the past several quarters the volume of problem assets at commercial banks has declined, and the size and the number of bank failures in recent years have been exceptionally small. although the demand for business loans has remained weak, the banking industry has continued to benefit from strong demand for household credit, not least for residential mortgage products. the outlook for asset quality is also favorable. as economic activity continues to grow and businesses become more confident about their customers ’ demands, business loan demand should increase, and pressures on banking margins should begin to ease. during the period of weakness and recovery, quite a large amount of core deposits flowed back into banks of all sizes reflecting lower interest rates on alternative assets, the softness of the stock market, and the public ’ s desire for safe assets. as a result, banks had ample liquidity and the resources to fund asset growth. more recently, with renewed interest in market securities