The Difference Between a Community Bank and a Big Bank

I recently spoke to a community group, and subsequently a community bank all-staff meeting regarding the definition of a community bank. The FDIC has defined community banks in their December 2020 Community Banking Report that either exclude or include the following criteria:

Seems complicated. Especially when a community bank could have no office with more than $8.24B in total deposits but could have no more than $1.65B in total assets. A pretty small asset size, in my opinion. But the FDIC did confess that a community bank was not easily defined. 

If you ask me, the definition of a community bank is more subjective. Here is how I defined the difference between a community bank and a big bank.

A community bank lends depositor money here.

A big bank lends a little here, there, and everywhere.

A community bank is vested in the success of the communities it serves. When the community(s) suffer, so does the bank.

A big bank is hardly vested in the success of any one or a few communities.

A community bank's risk management practices, such as lending to certain industries, making character loans, deposit availability, etc. are made near the customers most impacted by those practices.

A big bank makes risk management decisions at headquarters in a location far, far away.

Community bank customers get the bank's A-team.

If you're not a very large borrower with eight figure loan needs, you're likely getting a bench player, if you get a player at all. You might end up with a bot named Michele or Michael.

Community bank leaders are at your churches, in your restaurants, at the ballfields, and in your community organizations.

Big bank leaders are not.

Communities are better for having community banks in them. Is that true for big banks?

~ Jeff

Community Involvement: Good investment or waste of time?

A bank CEO at a strategic planning retreat opined: it is far more productive to implement a disciplined calling effort than to attend community events. Yet community involvement continues to be cited by community financial institutions as something that distinguishes them from large banks.

Who is right? In its most basic form such as deciding whether to attend a local Rotary Club event or to spend those two hours calling on clients and prospects, I would agree with the bank CEO. It would yield far more results doing the latter. Community involvement by financial institutions should not be considered an end in itself. It should be considered a means to an end… to build relationships that generate business.

Let’s drill down to specifics. A bank’s market manager attends four monthly Rotary dinner meetings. Let’s call her Cindy. She meets numerous people at the meetings, but it takes four times together before she thinks there is a strong enough relationship to call on her newfound acquaintances. Each dinner cost $100 for Cindy to attend.

As a result of her participation in Rotary, she calls on eight contacts. Four agree to meet with her, and one decides to do business with her bank. The new client owns a small business that requires a line of credit and a business checking account. The line of credit turns out to be essentially a home equity line of credit.

According to my employer’s 3Q09 profitability peer database, the average balance of a business checking account is $25,193. The coterminous spread is 2.44% of the balance, and fees represent 0.80%. Therefore, the checking account generates $816.25 in annual revenue for the bank (see link below to my employer’s website for profitability reporting services).

Home equity lines of credit have an average balance of $71,340 and a coterminous spread of 3.05%. This generates annual revenue of $2,175.87. Therefore, if this new customer brought the above mentioned average balances, the bank would generate $2,992.12 in annual revenue. Recall the cost of those four Rotary meetings was $400.

My marketing-type friends would jump all over this, citing an incredible ROI. This gets to a common yet energetic discussion between bank marketing and finance people. Finance wants to cover the cost of Cindy, her branch, and all those back-office folks supporting the branch. Marketing wants to focus on the marginal cost, the $400 in dinner fees. But I digress. This discussion will have to wait for another day.

The point that should not get lost is the primary purpose Cindy gets involved in the community is to get to know people that she can later call on for business. So often bankers execute on the former, but don’t follow through on the latter.

A personal example is the case of two Northwestern Mutual Insurance agents. One agent I met in business school. A few years after graduation, he called on me to discuss his company, his specialties, and to gauge if there was potential for him and me to do business together. Another agent, unrelated to the first, received my name via a referral from a mutual acquaintance. He also called on me to introduce himself and the company. As I mentioned in previous posts, my former bank never called on me in the fourteen years that I banked there. In the fifteen years living where I live, only one other bank called on me and asked for my business.

I’m not saying I should be the focus of business development efforts by local bankers. But the fact that I have been an active member of my community for an extended period of time with little in the form of proactive contact by local bankers makes me believe that others are receiving similar neglect.

Community involvement by banks was not designed to make us feel good about ourselves; although this is certainly a benefit. Community involvement supposed to initiate relationships that have the potential to become profitable business for banks. If community banks are to succeed, we must focus on end results.

Does your bank generate leads from being involved in the community?

- Jeff

The Kafafian Group website of products and services/performance measurement

http://tinyurl.com/ydhg4cs