The Banking and Finance Review

Persistence and Profitability of New Jersey Community Banks

Jason Hecht


The declining number of community banks and increased deposit concentration among larger interstate institutions have raised regulatory concerns about the impact on competition within the banking sector.  This investigation tests whether the presence of out-of-state and large in-state banks operating within the county where a New Jersey community bank is headquartered has a positive or negative impact on their profitability and deposit rates.  A panel dataset of 66 long-lived New Jersey community banks are used in this study.  The empirical results suggest that the presence of large, non-domiciled banks depressed both community bank profitability and interest rates paid to depositors.  Factors that exerted a positive impact on community bank profitability included the Herfindahl-Hirschman index of deposit concentration in a bank’s home-office county as well as community bank size and retained earnings.  Community bank profitability also benefited from a lower unemployment rate in the county where they are headquartered.  However, a higher statewide share of deposits had a negative impact on profits, suggesting a trade-off between growth and profitability.  Community bank deposit rates were negatively associated with deposit concentration but positively associated with community bank size and branch shares as well as a lower home-county unemployment rate.  Although the presence of large out-of-state banks depressed rates paid to community bank depositors,  the impact diminished as their presence increased.



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