Community banks are near and dear to my heart. After I explain why, if they aren’t already, they’re likely to become the same for you, assuming you pursue my recommendations. Many community banks were ravaged by the residential real estate debacle due to taking excessively large positions in home builders that built subdivisions with houses that stopped selling or by taking overly significant positions in mortgages. The community banks that were most affected by the real estate downturn were those in Florida and Georgia, which saw a record number of new banks created between 1997 and 2007, and subsequently saw a record number of closures between 2008 and 2013. Other states that were hard hit by drastic drops in real estate prices including Arizona, Nevada, and California also saw a decrease in the number of community banks.
Portfolio risk led to closures.
Portfolio risk results from overweighting in a sector or industry and some of those banks reaped the adverse repercussions of the decision to overweight. However, many remain strong or have recovered nicely from the Great Recession. The states mentioned above still have a high number of community banks. These banks invested in other types of businesses and largely avoided residential real estate and mortgages, or assigned these two sectors a much smaller proportion of their respective portfolios. These community banks deserve a long look as a great source for loans.
Community banks are often aggressive.
Community banks tend to be more aggressive than national banks in working with small businesses. Community banks primarily operate in one region of a state, hence the name “community”, although some larger ones are state-wide or span across a few states. They are small, nimble, and purposefully organized to serve the needs of their communities. Some focus on consumers in the community and provide consumer banking, loans, and mortgages. Others focus on small and medium businesses and provide loans and other banking products for a number of businesses and projects.
Community banks have a much simpler structure than large conglomerate banks such as Bank of America, Wells Fargo, or Chase. They have deposits, loans, money market accounts and CDs but rarely offer more complex investment or banking products. They are usually hungry to build assets — at a pace they can manage. Although a few cater to high net worth individuals, most pursue businesses as a more rapid means of building assets. Most large private and publicly traded corporations bank with the national banking conglomerates for a number of reasons. Consequently, many community banks pursue small and medium businesses (SMBs) and SMB loans aggressively.
When to use community banks:
If you are a small or medium business that primarily utilizes one or two banking locations and if you are looking to establish or build upon a strong local presence or local relationships, community banks are for you. If you need loans in excess of $3 to $5 million, to help you determine the best bank for your needs, call around and inquire about the lending limits of the community banks in your area. Why? Some community banks have lending limits to any one company equal to this amount. In excess of that amount, the loan would need to be syndicated. (“Syndicated” means the total loan amount would need to be divided among a few banks. That is a subject for another day.)
Perhaps your loan needs are much smaller. Regardless of the loan amount you need (assuming it’s within the stated loan limits), the best scenario is to identify a community bank at which you can establish and build a relationship that grows as you grow. You may only need a $250,000 loan now, but in two years you may need a $2.5 Million loan. If your bank’s allowed loan size can grow with you, you will have room to expand without needing to change banks.
Once you locate the best community bank for your needs, develop a relationship with a business banker. For information on how to do this, refer to my earlier article, “The Importance of a Relationship with Your Banker “. To further aid in developing the relationship, place your deposits with that bank. Make sure you update your banker periodically, i.e., at least quarterly. The more he or she knows about your business, the higher his or her comfort level will be, and the easier it will be for you to increase your loan size or navigate financial problems should they arise.