Community Banks: “Making Capitalism Possible for Everyone”

Patricia O’Connell

Community banks are the leading provider of credit to small businesses, playing a critical role in entrepreneurship. In contrast to large financial institutions, they tend to practice “relationship banking,” which is about working one-on-one with customers and evaluating each individually.

A woman placing a sign in a store window that says Open.

Think of a community bank, and what may come to mind is the bank that is run by the genial George Bailey (played by Jimmy Stewart) in the holiday classic It’s a Wonderful Life. Bailey gives impassioned speeches about investing in the town of Bedford Falls and under his stewardship, Bailey Building and Loan makes loans to people and businesses that other banks might have thought twice about, and helps the community as a whole prosper.

Though the movie is fictional, Bailey and his bank epitomize the role of community bankers and banks, practicing a very real type of banking, what the Federal Reserve Bank of Atlanta calls “relationship banking.” As described by the Federal Reserve Bank of Atlanta in The Uniqueness of Community Banks, “Relationship banking…generally involves the use of soft information, which is not readily available or easily quantifiable. Soft information requires more human input and evaluation and is acquired primarily by working one-on-one with the banking customer.”

This approach is characteristic of community banks and underscores the role they play in financial inclusion and building local businesses. While there is no strict definition of a community bank, the Federal Reserve generally characterizes them as organizations with less than $10 billion in assets, channeling funds where their customers live and work. Their ability to grow, either through mergers and acquisition or by opening new branches, depends on the grades they receive from the Federal Reserve on such criteria as whether the bank is lending to small businesses and low- and moderate-income families; whether they have investments, and whether they are of service to the community.

Community banks are the leading provider of credit to small businesses, playing a critical role in entrepreneurship, according to the Federal Reserve’s Small Business Credit Survey: Report on Employer Firms. As of 2011, they held 14 percent of banking industry assets, but 46 percent of the industry’s small loans to farms and businesses. Observes Matt Olney, Managing Director and regional bank analyst at Stephens Inc., “Community banks are often not just the lifeblood of their communities, but they are also a reflection of their communities. The health of the bank and the health of the community are mutually dependent.”

Look at the example of Southern Bancorp Inc., which serves southern Arkansas and the Mississippi Delta. In 2017 Southern originated more than 6,000 loans, and more than half of those were for less than $10,000. Not only does the bank use the money to make traditional loans to people in the communities it serves but also makes investments in school bonds, water bonds, and other community infrastructure.

From its humble beginnings with an initial investment of some $10 million in 1986, Southern has grown to become one of the largest community development organizations in the country. Today, Southern Bancorp has some $1.2 billion in assets, with more than 80,000 customers and 43 branches, primarily in underserved markets in Mississippi and Arkansas. Says CEO Darrin Williams, “We have been very successful from a profit standpoint of doing business in those communities where others have chosen to leave.”

Indeed, institutions such as Southern may well be the only local option for financial services. According to a 2016 report by the Federal Deposit Insurance Corporation (FDIC), more than 20 percent of the country’s 3,100 counties are exclusively served by community banks – a sector that has seen significant consolidation. Between 2010 and 2016, about 1,000 community banks around the country were acquired, and nearly two-thirds of them were headquartered in metro areas, according to a 2017 FDIC report. Observes Olney, “M&A has been a big part of industry growth over the last 20 years and that is likely to continue.”

However, in the wake of the consolidation there has been a slight uptick in the number of community bank branches. In 2016, the total number of bank branches decreased by 2.3 percent, while there was an increase of 0.2 percent in the number of community bank branches. That number may look small, but Olney points out that bank branches are, well, branching out, in terms of what they offer their communities. “There may be less foot traffic because of heavier investment in technology and more banks improving their online presence,” he says. “So banks often serve as community centers, offering meeting space to community groups as a way to increase foot traffic, visibility, and good will.”

While the challenge of getting people into bank branches isn’t unique to community banks, such institutions may have an advantage over larger banks. “Community bankers have incentive and motivation to ensure that the community is being developed and reinvested in by the public and private sector that is almost personal in nature,” says Olney. “They really want to make their presence known in the community.”

Southern’s Williams says he and his bank are motivated by both margin and mission. “Our focus is to grow and expand in those communities where we know capital is needed and to allow capitalism to really work for everyone,” he says. At the same time, he knows for that to be possible, there needs to be not only access to capital but to information and education as well. He points to the work done by Operation Hope Inc. and its founder, John Hope Bryant, as critical to complementing the work of community banks.

Operation Hope is the largest not-for-profit provider of financial literacy, financial inclusion, and economic empowerment tools and services in the U.S. Among other programs, Operation Hope runs a Small Business Empowerment Program for aspiring entrepreneurs from low-wealth neighborhoods, offering business training, financial counseling, and lending services. Bryant has been outspoken about the need to change the fact that less than 1 percent of all venture capital investment goes to African Americans.

“Operation Hope is a great example of what can be done when private and public institutions work together,” says Williams. “Your zip code should not be determinant of your opportunity. “