Community banks, the locally owned and operated institutions that specialize in people, families, farmers and businesses, have rebounded from the depths of the Great Recession and have as many opportunities as challenges on the road ahead.
In the Lexington area, community banks can be as small as Nicholasville-based Farmers Bank, which operates just four branches, or as large as Community Trust Bank, based in Pikeville, which operates 70 banking locations across central, eastern northeastern and south central Kentucky and a few branches in West Virginia and Tennessee.
“Community banks probably don’t have policies and procedures that are as tight in whatever they are doing,” said Larry Jones, Community Trust Bank’s Central Kentucky president, comparing community banks with larger ones. “Bankers have a little more latitude to make decisions relative to their local market. That’s the way we work.”
On decision-making at the community bank level, Jones acknowledged that flexibility is the key.
“It doesn’t always have to be a ‘round peg in a round hole’ approach,” he explained. “We see the customer, understand their situation and perhaps modify a product to fit what they want. That doesn’t mean big banks don’t do a good job, but they can’t make those modifications like we can.”
Charles Vice is commissioner of the Kentucky Department of Financial Institutions. His office oversees Kentucky’s state-chartered banks with individual assets ranging from $50 million up to $5 billion.
Vice says community banks are often defined by their business models and asks: “Where do their deposits come from? Where do they do their lending? Where are the decision-makers based? Is it local? Where is the board constituted? Here in Kentucky.”
Vice cites JPMorgan Chase Bank, with its $4 trillion in assets, as an example.
“It is difficult for Chase to provide personal, unique customer service as opposed to someone walking into a community bank in, say, West Liberty, Hindman or Cadiz, Kentucky,” he said. “Managers and the board of directors are from there. They’re all vested in the community and want to see it succeed.”
Community banks compete with bank giants like Chase, Bank of America and Wells Fargo. The Federal Deposit and Insurance Corporation (FDIC) estimates community banks hold 14 percent of the nation’s banking assets, half as much compared with the mid- 1980s. The banking crisis of the late 1980s and early 1990s and the financial crisis that began in 2007 pushed some institutions into bankruptcy and others into consolidation, according to the FDIC.
Regulatory changes in the national banking system also fueled the creation of mega-banks that eroded the influence of community banks.
Community Bank Challenges
Vice sees several challenges that Kentucky’s community banks must take on. He predicted increased information technology demands for both banks and their customers.
“Customers demand more services online or through the Internet. There are challenges in offering them, from developing applications for mobile phones to protecting the information,” he said.
One banking trend that has emerged is companies not affiliated with a particular bank offering financial services over the internet. It may include taking applications and writing home and auto loans online.
“That creates competition for banks,” said Vice, who noted that customers must be careful of who they deal with in these financial transactions because they are surrendering their personal information.
Cyber security threats are an ongoing problem. Vice said one Kentucky bank reported more than 10,000 “attacks” on its system by hackers in a short time span. Fortunately, the bank had a strong firewall and thwarted the attacks.
The continued low interest rate environment is another challenge. The largest source of income for banks is the difference between the interest they pay customers for their bank deposits and the interest they charge customers for their loans. Because banks are charging such low interest rates for loans, banks have dropped the interest rates for deposits to near zero.
Increased compliance costs are another problem for community banks. The federal Dodd-Frank Act created a slew of new, tighter regulations that banks must follow. Banks have hired more compliance officers just to be safe.
“Banks say employees spend 30 to 40 percent more of their time on each loan they originate simply because of the new paperwork generated to meet all compliance requirements,” said Vice.
Banks also are spending more on consultants and for updates to their systems for new disclosures.
Vice cites succession planning as another major concern for community banks, especially if senior management and board members are nearing retirement age.
“It’s difficult in smaller communities to find individuals to hire for middle or senior management,” he said. “Many banks also find it hard to identify people in their communities to serve on boards.”
Opportunities
Information technology demands are a challenge but also an opportunity. Vice said many customers don’t want to enter a bank branch any more.
“So it is an opportunity for banks to expand their online customer base,” he said.
Large national banks are exiting certain markets, creating opportunities for community banks to fill the void. Mergers are increasing.
“When I became commissioner in 2008,” Vice said, “we had 156 state-chartered banks and now we’re down to 132. Most came about via merger.”
No matter what challenges and opportunities await Kentucky’s community banks, they will need to be nimble to survive.
“You learn how to adapt when doing this business,” Community Trust’s Jones conceded.