Attributes of Community Banks

Importance of relationships
Community banking is relationship banking. Specifically, community banks focus on high-touch customer relationships. They know their customers personally. Core deposits are obtained primarily from individuals and businesses within the institution’s trade area. Managers know how loan proceeds will be used and how borrowers expect to repay them. Community bankers know their communities because they live in them and serve as community leaders.

Dr. Tim Koch

Business Focus and Pricing
For this personal service, community banks charge a premium. Customers who view loans or CDs as commodities will typically deal with the largest institutions or anonymously with any firm over the Internet. These customers are rate shoppers who have the resources and time to search for the lowest prices. Community banks do not have the pricing power that large financial firms have, so they compete by offering high-quality personal service to small businesses and individuals. Their investment niche is typically agriculture lending, small business lending and commercial real estate. They fund the majority of their investments with federally-insured deposits. Institutions that stayed close to these core business strategies have generally performed well before, during and after the onset of the crisis.

Community banks can be any size. The critical question is whether they emphasize relationships over transactions. As banks grow and expand their products and services, they often attempt to reduce costs by centralizing operations and decision-making. Once management emphasizes the volume of transactions over personal relationships, the bank loses much of the personal touch which distinguishes a community bank. The ultimate test of whether a bank is truly a community bank is whether management focuses on personal relationships and the type of decision-making associated with knowing your customer personally.

This is excerpted from an article by Dr. Timothy Koch, president of the Graduate School of Banking at Colorado and professor of finance at the University of South Carolina. Dr. Koch will be a featured speaker at the IBA Management Conference, February 8-9, 2011 in Des Moines.


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