The FDIC’s analysis of U.S. industrial transitions between 1970 and 2019 reveals the profound effects of economic shifts on metro areas and the community banks serving them. These transitions, driven by the decline of manufacturing and the rise of service-based economies, created challenges and opportunities for local economies and financial institutions. Below, we explore the key findings from this study and their implications for community banks.
The Decline of Manufacturing and Economic Shifts
Over five decades, the national economy moved away from manufacturing, with industries like steel, textiles, and machinery experiencing steep employment declines. Metro areas heavily reliant on these sectors, particularly in the Northeast and Midwest, faced significant economic stagnation. For example, cities like Youngstown, OH, and Flint, MI, struggled to replace lost industries, leading to slower population growth, aging demographics, and economic contraction. Meanwhile, metro areas in the South and West benefited from population inflows and economic diversification, fostering stronger economic growth.
Challenges for Community Banks in High-Transition Metros
Community banks in metros with high levels of industrial transition faced significant challenges. These banks experienced weaker deposit and branch growth compared to their counterparts in other regions. Their loan portfolios were heavily concentrated in single-family residential loans, with less exposure to business-related lending, which limited their growth potential. Despite these challenges, community banks in high-transition metros showed resilience during periods of economic stress, such as the Savings and Loan Crisis and the Great Financial Crisis, with lower failure rates than banks in other regions.
Strategies for Success: High-Performing Banks
Amid these challenges, a subset of high-performing community banks in high-transition metros found success through strategic adaptability. These banks diversified their loan portfolios, expanded operations beyond their local metro areas, and emphasized commercial lending. By focusing on growth opportunities outside their immediate regions and strengthening their balance sheets, these banks outperformed both their local peers and many banks in more stable metros. Their success underscores the importance of innovation and diversification in navigating economic transitions.
The Role of Metro Diversification
Larger, more industrially diversified metros, such as San Jose, CA, demonstrated the benefits of economic adaptability. San Jose successfully transitioned from computer manufacturing to a broader technology-driven economy, supported by high-paying jobs in professional, scientific, and technical services. This highlights the critical role of industrial diversity in building resilience during times of economic change. Smaller, less diversified metros struggled to recover, illustrating the importance of proactive economic planning and investment in diverse industries.
Lessons for Future Transitions
The FDIC study offers valuable lessons for navigating future economic shifts, including those driven by climate change and clean energy transitions. Metro areas and community banks that prioritize diversification, invest in high-growth industries, and adapt to changing market demands will be better equipped to manage these transitions. By learning from past challenges, financial institutions can position themselves as resilient and innovative partners in their communities.
Supporting Community Banks Through Transition
As community banks navigate the challenges of economic shifts, Young & Associates is here to help. Our expert guidance can assist financial institutions in diversifying portfolios, expanding operations, and developing strategies for resilience. Contact us today to learn more about our tailored services, and subscribe to our newsletter for the latest insights and updates.
