Financial Update (Second Quarter 2005)


Remittances to Mexico Move Faster

Fed Exits Noncash Business

Atlanta Fed President Discusses Business Ethics

Fed Unveils Real-Time ACH Monitoring

Fed Revamps Financial Ed Web Site

Atlanta Fed Publishes 2004 Annual Report

New Nickels Celebrate “Westward Journey”

What Makes Community Banks Unique?

Atlanta Fed Hosts Credit Conference

New Members Join Bank's SBAL Advisory Council

HMDA Data Will Include More Information


Data Bank

Circular Letters



What Makes Community Banks Unique?

To the public, all banks seem alike. But banking insiders make important distinctions between community banks and all other banks. Policymakers worry that community banks’ unique characteristics threaten their survival in the face of industry consolidation. However, despite dramatic regulatory and technological changes in the industry in the past two decades, community banks have not only survived but often prospered.

In an Atlanta Fed Economic Review article, authors Scott E. Hein, Timothy W. Koch, and S. Scott MacDonald explore the differences between community banks and larger banks to discover what makes community banks unique. Large banks engage primarily in transactional banking—the provision of highly standardized intermediation services, such as gathering deposits and extending loans, that require little human input to manage. Community banks, in contrast, typically focus on relationship banking, which requires more human input, more detailed credit evaluation, and localized decision making.

Examining profit and risk measures for the 1998–2002 period for both community banks and large banking organizations, Hein, Koch, and MacDonald find evidence that small banks were generally profitable. In all but the smallest size category, community banks have performed as well as, and often better than, large banks in managing net interest margins, aggregate profits, and credit risk. Also, community banks are more likely to adopt Subchapter S tax status, which allows them to avoid direct federal income taxation and pass tax benefits on to shareholders. These institutions typically have relatively higher returns on both equity and assets than larger banks do.

Economic Review article (Q1 2005)
Uniform Bank Performance Reports

Federal Deposit Insurance Corp.

Whether community banks will be able to sustain this good performance will depend, the authors conclude, on how well managers find valuable relationship lending niches, invest bank capital, and balance asset quality with growth.