Small Banks Coping with Population Loss

Small Banks Coping with Population Loss

A new study by the FDIC found that thanks to a strong agriculture sector small banks based in rural areas are coping better than expected in the face of a steady exodus of residents. In fact, they’re doing better than metro-based community banks.

But how long rural banks will be able to stay strong, especially when you combine the toll being taken by tightening regulations that make it ever-tougher for small banks to lend and the unpredictability of the agriculture industry, is a much dodgier question to answer.

The study, “Long-Term Trends in Rural Depopulation and Their Implications for Community Banks,” issued Monday, found that community banks headquartered in depopulating rural areas‒‒concentrated in the Great Plains and the Corn Belt, where 885 banks have their headquarters, despite steady depopulation since 1980‒‒have fared better in recent years than those headquartered in metro areas.

The main reason, reported the FDIC, is in rural banks’ concentration in agricultural lending.

According to the USDA, despite the historically volatile nature of the agriculture industry, where consolidation and food imports from other nations have made American agribusiness a rollercoaster ride for only the strong-stomached since 1980, U.S. agriculture has ridden a prolonged and unusually strong period of growth in the past decade. Annual net farm income in the U.S. averaged $84.5 billion between 2004 and 2012, up more than $20 billion a year over the period a decade prior. The USDA anticipates $123 billion for 2013 when its figures are calculated.

The upswing in agricultural revenue and a negligible effect on job loss during the recession have allowed agri-focused rural banks to weather sharp dips in commercial and mortgage lending in areas that continue to see population erosion, the FDIC study found. Moreover, the strong agriculture sector has allowed rural community banks to grow their assets, which typically is a major hurdle for small banks. Agriculture-related revenues made up 19.3 percent of the assets of small, community banks in depopulating rural areas in 2012, the study found.

This is the second piece of good news concerning the wherewithal of small community banks that the FDIC has reported this spring.

An April report from the agency found that small community banks are particularly resilient to consolidation trends. However, the report cautions against sustained optimism. For one thing, the largest dearth in rural population is in young adults, those between 20 and 40 who build families. This means that in addition to decreasing population, fewer young people are moving to rural areas and contributing to any rural repopulation. Perhaps more potentially alarming, though, is the simple fact that the good times do not stay good forever.

“It is probably not reasonable to assume that the agricultural sector will continue indefinitely to enjoy the exceptionally strong conditions of recent years,” wrote the study’s authors, John Anderlik, assistant director of the Division of Insurance and Research, and Richard Cofer, regional manager of the division. “Should farm earnings return to their normal level, most likely the banks that operate in rural areas will see their growth rates revert to levels more in line with historical norms. At the same time, as the overall economy continues to recover from the recession, metro-based community banks should see their growth rates improve.”

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