Market share, larger competition and the profitability of rural, small community banks

Abstract

Purpose

Community banks continue to offer important financial services including agricultural and small-business lending as well as residential mortgage origination. Because community banks’ share of available source funds may be threatened in rural markets due to competing larger banks seeking less expensive core deposits, this study examines whether large-bank competition, market share of deposits and changing market share impact the profitability of rural, small community banks.

Design/methodology/approach

Using a Heckman-type selection model to control for sample selection bias, ordinary least squares (OLS) regression analysis with time and bank fixed effects is conducted to study the drivers of profitability in small, community banks that operate exclusively in rural markets. Profit drivers for rural, small community banks of particular interest in the study are larger-bank competition, market share of deposits and year-to-year change in market share of deposits.

Findings

The research indicates that rural, small community bank profitability decreases in concurrent market share of deposits and may increase in changing market share but that the presence of a larger competitor decreases the profitability of small community banks in rural markets as larger banks compete for deposits in these markets. The paper also finds that increased Internet access in rural markets accompanies lower performance for small community banks, indicating that online banking services may threaten rural, small community banks.

Originality/value

This paper offers new findings to the literature on the performance effects of large competitors in rural banking markets. The results suggest implications for managers of rural, small community banks and offer additional knowledge about profit drivers of rural, small community banks of which regulators should be cognizant.

Citation

Spurlin, W.P. (2022), "Market share, larger competition and the profitability of rural, small community banks", Managerial Finance, Vol. 48 No. 11, pp. 1579-1590. https://doi.org/10.1108/MF-07-2020-0387