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Other Issues of Financial Industry
Perspectives
Analysis of banks in Tenth District states that have adopted Internet banking shows an
adoption rate that is similar to the rate for the United States. Community banks,
especially in rural areas, are lagging behind other banks in introducing Internet banking.
Banks that have adopted Internet banking have introduced it in markets with demographic
and economic characteristics that help to ensure customer acceptance. They have also used
the Internet in a way that complements their business strategy. Banks who offer Internet
banking rely more on non-core funding, and are developing the Internet to tap another
non-traditional source of funds. Large banking organizations in the region have a strong
retail orientation, and they have tailored their Internet offerings to appeal to retail
customers. Community banks have a business orientation, and offer online services that
appeal to their business customers.
Performance of banks with Internet banking in general is similar to those without
Internet banking. Profits for banks with Internet banking have not suffered, despite some
relatively high expenses. These banks generate comparatively more non-interest income,
which may help to overcome additional expenses. Measures of risk are also similar for
banks with and without Internet banking.
Among banks that do offer Internet banking, newly chartered banks have particularly
poor performance characteristics. Community banks that are under two years old and who
offer Internet banking have extraordinarily high expenses and, as a consequence, large
losses.
Beginning in 1997, many community banks became eligible to elect a new form of
ownership, referred to as Subchapter S. Through June of 2000, 18 percent of the community
banks in the United States had changed to this new ownership status. The Subchapter S
ownership form effectively eliminates the double taxation of dividends and capital gains,
which promises to significantly increase the after-tax returns to bank shareholders. This
article reviews the characteristics of banks that have converted to Subchapter S status
and identifies changes in their behavior or performance subsequent to conversion. Through
the use of a survey, it also investigates the motivation of banks that converted and their
impressions of how well conversion has met their needs.
Banks that converted to Subchapter S status tend to be well capitalized, but
slower-growing than other banks prior to conversion, and to have a history of higher
levels of dividends. After conversion, dividend payout rates increased, leading to reduced
levels of capital in Subchapter S banks. However, capital levels still remained strong,
and no other indications of decreased performance or increased risk taking were found.
Among the bankers surveyed, most have been generally satisfied with the results of
conversion, and many indicated that Sub-chapter S enhanced the value of their bank and
made it a more desirable investment vehicle.
Many agricultural communities in the Midwest have experience protracted job and
population loss. With recent strains in agriculture and the potential for further loss
looming, many bankers have expressed an interest in initiatives they can undertake to
promote local growth and development. This article outlines a community development
process to help bankers succeed with their development activities. Within the context of
this process, it recounts the community development initiatives of several small rural
community banks, examining the management decisions behind them and lessons gleaned from
them.
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