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U.S. Community Bank Profitability: A Cross-Sectional and Dynamic Panel Analysis of Rural and Metropolitan Banks

Document Type

Article

Publication Date

7-2020

Abstract

This study compares 5,286 community banks operating in rural and metropolitan counties from 2000 through the end of 2013 on the variables contributing to bank profitability using pooled OLS, pooled time-series OLS, and dynamic panels methodologies. Following the SCP and competition-fragility literature, one would expect a difference in the variables contributing to profitability. The size of the coefficients indicates that the variables contributing to profitability differ in magnitude when comparing community banks in metropolitan counties to those in rural counties. Both the pooled and time-series OLS models indicate that bank size contributes to profitability more in metropolitan areas; however, on average, rural banks have higher return on assets, higher net interest margins, and higher non-interest income. These findings provide some support for the competition-fragility argument that more competition in banking, as seen in metropolitan areas, leads to lower net interest margins. Arguably, the higher net interest margins and contribution of non-interest income to profits in the concentrated rural bank markets supports the structure-conduct-performance paradigm that when few competitors exist in a market, they are more likely to collude, implicitly or explicitly, to extract higher profits. The findings of this study indicate that community banks are not a homogenous group and highlight the importance of segregating rural and metropolitan banks when examining the US community banking industry.

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