This is the fifth in a series of articles on the U.S. banking system. Each article will cover one type of financial institution that engages in banking. This fifth article covers community banks. The last article covered commercial banks. Future articles will cover additional types of banks.
A bank is called a community bank for a good reason. The community is priority number one.
According to the Independent Community Bankers of America, there are more than 6,000 community banks of all sizes and charter types. They hold $3.8 trillion in assets, $3.1 trillion in deposits, and have $2.6 trillion in loans to consumers, small businesses and the agricultural community. They represent 96% of all banks; have 51,000 locations in the U.S., and assets that range from $10 million to $10+ billion. Community banks are regulated by federal and state laws and supervised by agencies such as the Office of the Comptroller of the Currency (OCC), the Federal Reserve (FRB) and the Federal Deposit Insurance Corporation (FDIC).
What separates them from other types of banks?
"Community banks are what banking used to be," says Julie Murphy Casserly, president of JMC Wealth Management. "They are really entrenched in the community. They know the pulse of what is going on. When you have a unique banking need, like borrowing money in a non-conventional way, community banks can be a bit more out of the box with their solutions to clients’ needs. They don’t take the ‘cookie cutter’ approach that large banks do towards customers."
Community banks have some advantages. Jim Angleton, president of Aegis FinServ Corp, who has owned an OCC chartered community bank, provides insight. "They are staffed by local trained, usually generational bankers that know the community better than big banks. They tend to remain in their lane at ground level to help small business owners with banking needs."
He says that unlike big banks, which offer only certain products, community banks adapt to the business landscape and can be more understanding of local market trends and make recommendations as if they were a business partner. "Sometimes they join your advisory board of directors to add expertise to the business." A bank is only as good as its employees. "Community bankers do not jump from bank to bank in order to increase their paycheck. It is common to see a 20+ career banker who will stay at the same bank and is always there for you."
L. Dean Clausen, chairman and CEO of BankChampaign has his office right by the front door. "I want to make sure that when customers are asking themselves which bank is right for them, they know I am front and center to meet their needs."
He’s quick to say that community bank’s purpose is to be part of the fiber of the community. "We provide the bulk of the funding for organizations like the United Way and the Chamber of Commerce. We give our staff paid time off to volunteer to serve Meals On Wheels to the elderly and shut-ins. Banks like ours provide the predominant source of credit for minority owned businesses, churches, community building projects like YMCAs, hospitals and community colleges."
Lending is a specialty for community banks. They provide residential, commercial, business and corporate loans, letters of credit, EXIM lenders, grant providers for CRA, SBA and other outlet grant-guarantee small business and start up loans. "They are creative and collateralize loans differently than big banks," says Angleton.
"Many community banks are willing to consider character, family history and discretionary spending in making loans. Megabanks, on the other hand, often apply impersonal qualification criteria, such as credit scoring to all loan decisions without regard to individual circumstances," says Mary Ann Scully, CEO of Howard Bank.
Loan decisions are local. "They are made by people who understand the community and aren’t six states away. That gives the customer a better chance of having a loan approved," points out Holly Wolf, chief marketing officer for Conestoga Bank.
Unlike large banks that may take deposits in one state and lend in others, community banks channel most of their loans to the neighborhoods where their depositors work and live, helping to keep the area vibrant and growing, adds Scully.
Their impact on local communities is huge. They are a driving economic force.
Small has some disadvantages too. There has been a fair amount of consolidation to remain viable in tough economic times. Small-bank failures have represented a disproportionate share of FDIC losses in recent years. Between 1998 and 2002, for example, community banks with 63 percent of failed-bank deposits accounted for approximately 72 percent of the FDIC’s failure costs.
Big banks boast the ability to offer higher lending thresholds than community banks. "This means in certain cases they can create a 85% loan to value mortgage while the community bank leverage is at 75-80%," says Angleton.
Then too, big banks give their lenders a certain line of credit authorization and can approve a loan in a day and close it by the third day. However, community banks typically have a loan committee that meets once of twice a month. "They can poll the directors, but must still have a quorum and ratify when they officially meet," says Angleton.
Another issue, too, "Big banks are nation wide and can entertain your needs at branches. While community banks let depositors access out of town ATMs at their cost, but that is it…just access to your cash. If you find a property out of state, they cannot typically securitize or collateralize that loan out of their marketing boundaries," adds Angleton.
Big is a buffer. Large banks can have double the assets, reserves and impaired loan loss reserves, while community banks have the same, when they hit their limits, they have to stop lending and regain profitability to stabilize faster, says Angleton.
In the end, it comes down to what’s important to you. "Do you want to be able to talk to someone who takes the time to understand you and your financial position? Do you want flexibility in pricing of loans and deposits, based on your particular business? Do you want the decision on your loan or deposit rate made by people who are your friends and neighbors?" asks Clausen.
When BankChampaign started 26 years ago it had limited resources. It has grown from $4 to $230 million. Says Clausen, "We grew by focusing on our community and its people."