De-Ruralization Helped Community Banks Weather Crash: FDIC

De-Ruralization Helped Community Banks Weather Crash: FDIC

One of the side effects of agricultural improvements has been the steady depopulation of rural America, as young people with few local prospects move to metropolitan areas for better opportunities. Between 1980 and 2010, the population of the US increased 36%, but the population in a third of US counties fell. Losing young people in the midst of their careers wreaks havoc on local government as it struggles to maintain infrastructure, and it seems like community banks should struggle as depositors go elsewhere.

But not only have community banks in depopulating counties not struggled in recent years, they have had better performance than their peers (community banks in metropolitan areas or growing rural areas) in the years following the recession.

Community banks: Agricultural loans were safer than CRE or C&D after the crisis

“In the years leading up to the financial crisis and recession, community banks in depopulating rural areas reported earnings and asset quality performance that was relatively similar to the performance of banks located in more economically vibrant areas,” write John Anderli and Richard Cofer Jr of the Division of Insurance and Research at the Federal Deposit Insurance Corp (FDIC). “Through the recession and its aftermath, the community banks in depopulating rural areas outperformed their peers.”

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Anderli and Cofer divide counties into three categories: growing, declining, and accelerated declining, meaning the rate of decline has increased in the last decade. Just four regions, Great Plains, the Corn Belt, the Delta-South, and Appalachia-East, accounted for the vast majority of depopulating counties: 530 of 650 declining counties and 343 of 393 accelerated declining. What’s more, the trend of declining counties seems to be speeding up, with accelerated declining counties rising from 188 to 393 between 2000 and 2010.

The FDIC report found that community banks have responded to this situation by focusing on agricultural loans, though it’s not clear they had much choice as other lending opportunities dried up. Either way, these banks had a distinctly different mix of loans than banks in metropolitan areas. Commercial real estate (CRE) and construction and development (C&D) loans played a much smaller role in their business, and these were the products that disproportionately went bust during the crisis. In 2008, agricultural loans were safer than almost anything else.

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Branching out did more harm than good

To drive the point home, Anderli and Cofer also look at a subset of these community banks in declining counties that branched out to metropolitan areas to try to increase their assets. The result was that these banks ended up with a greater mix of CRE and C&D loans in the mix, and they faced higher rates of non-current loans as a result.

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