Envisioning the Future for Community Banks

Written by The HORNE Banking Team | November 05, 2015

Community banks have many strong assets that offer every reason for optimism. Even in the face of technology change, new demographics and increasing globalization of services, these smaller, local institutions have a host of leverageable assets.[1]

Community banks are structured to serve the needs of local families and businesses, making them integral to the region where they are situated.

Rather than taking deposits in one state and lending in another, community banks channel most of their loans into local neighborhoods, contributing directly to the health of the community.

Community bank leadership and board members generally are accessible to their customers and often represent the composition of the local population, adding a factor of familiarity and trust.

Because many community banks are small businesses, they can empathize with the needs of small business owners.

Community bank officers typically get involved in local community affairs, showing their value in and out of the branch.

Many community banks consider character, family history and discretionary spending in making loan decisions, rather than relying solely on standardized qualification criteria.

Community banks make decisions locally, offering a level of agility and efficiency that tells the customer they are valued.

With all these competitive advantages, why is the number of community banks shrinking? From 1934 until 1988, the count remained steady at around 14,000. By the end of 2014, there were only about 5,600 community banks nationwide.[2]

For as many inherent assets as these institutions have, they face an almost equal number of challenges. Analysts and regulators – and the banks themselves – point to a host of issues that have caused the rapid and significant closures and consolidations. In particular, the strain of extremely low interest rates, increased regulations, and intense competition all have driven up the cost of traditional banking. New technologies are bringing new market entrants and new channels for large banks to reach customers in rural markets, adding new competitive forces against which banks must innovate with uncharacteristic speed.

Alone or in combination, these market factors make one thing clear – the banking landscape is transforming. It is harder than ever for community banks to remain relevant to customers and investors. Yet, we know that challenge and adversity are the seeds of opportunity.

Those community banks that have survived the massive decline in numbers should be thinking strategically about the future. Considering the impact of hard trends, regulations and actions of competitive institutions can help to make and act on a plan for longevity. The strategy could include making plans to participate in the consolidation by buying or selling a bank, planning for succession, adopting new technologies, or adding a unique specialization.

Consider which of your inherent assets remain relevant, and what changes will position you to serve current and prospective customers and shareholders to the best of your ability. Whatever growth strategy looks like for your bank, the point is that now is a great time to consider what your future will look like.

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[1] Extrapolated from Independent Community Bankers of America

[2] Federal Deposit Insurance Corp.

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