Central View: Community Banking in the 21st Century

Over the past 20 years, we have seen a material and sustained change in the structure of banking. Twenty years ago, there were more than 10,000 community bank charters. As of the end of 2012, there were approximately 6,000. Over that same time period, the percentage of banking assets held by community banks fell from 50 percent to 17 percent. The past five years have further challenged community banks, with nearly 500 bank failures over that time.

Yet, we intuitively know that community banks are important to their communities and the U.S. economy.

For that reason, the Federal Reserve System and the Conference of State Bank Supervisors partnered to sponsor Community Banking in the 21st Century, the inaugural community banking research conference held Oct. 2-3 at the Federal Reserve Bank of St. Louis. The goal of the conference was to foster expanded research on topics affecting community banks and to encourage policymakers to be cognizant of the value these institutions provide.

The conference covered three sessions of academic papers and one practitioners’ panel composed of bankers. The first academic session addressed the role of community banks; the second, community bank performance; and the final session, supervision and regulation. (Summaries of the papers can be found in "Bankers, Regulators and Academics Gather at St. Louis Fed to Discuss State of Community Banking" in this issue of Central Banker.) The practitioner session covered the results of 51 town hall sessions held in 28 states and involving 1,700 bankers. Attendees also heard comments from Federal Reserve Chairman Ben Bernanke, Fed Gov. Jerome Powell and banker Dorothy Savarese.

The conference noted a number of strengths of community banks:

• Community banks have a key advantage: social capital. They are an integral part of their communities.
• Community banks have intense knowledge of the local market and flatter organizational structures. They are willing to tailor products to local needs (if the cost is not too high).
• Community banks play a critical role in small-business, farm and residential lending. This lending is critical to community building and stabilization.
• Community banks enhance the chance for survival of startups. Startups create jobs.
• A large number of community banks execute exceptionally well on the fundamentals.
• Great management can do great things, such as turning around a severely troubled bank.

However, challenges persist, including:

• Outmigration of population from small communities, which creates issues for economic viability, workforces and succession planning
• Rapid changes in technology, which create new competitors and new costs (but opportunities as well)
• Growing compliance costs
• Lack of economies of scale
• Management exhaustion, making it difficult to be visionary and strategic
• Banks seeking profit by undertaking big shifts in strategy without the necessary expertise

Finally, the conference found some possibilities for innovation. While more exploration is needed, they include:

• Finding “pockets of opportunity,” such as equipment lease financing and Small Business Administration lending
• Focusing on talent management, such as using local retirees as a source of mentoring and focusing on the development of younger employees
• Creating mechanisms to more closely align regulation with risk

Video recordings of the sessions and PDFs of the academic papers are available at www.stlouisfed.org/CBRC2013. Overall, the conference was encouraging. While challenges persist and some consolidation may be inevitable, the community bank business model clearly remains viable and important to the communities served.