Once upon a time, small-business executives had a clear banking choice: Pick a small institution for faster credit decisions, customized terms, and friendlier loan officers, or choose a large bank for a wider array of services, expertise, and convenient locations.
Now the choices arenít quite as clear, however; many of the differences between large and small banks are narrowing, according to industry experts. Large, regional institutions are improving personal service, cutting loan approval times, and beefing up small-business and minority programs, while small banks are broadening services such as payroll, insurance, and financial investing.
Still, executives in both banking segments insist that they maintain an edge in certain areas.
"I would challenge any community bank to provide the services and resources that we provide to small businesses," says Benito Almanza, head of SBA lending for Bank of America. "There are certain things we canít do, but 90 percent of the time we have the advantage."
If that were true, says Ignacio Urrabazo, president of Commerce Bank in Laredo, Texas, small banks would be headed for extinction.
"We are viable because people want our service," he observes. "We structure loans to accommodate the uniqueness of customers. We donít offer canned deals like large banks."
Following a wave of consolidation in the bank industry a few years ago, many industry analysts predicted that small players would not be able to compete with the growing depth of services offered by the giants. During the last 15 years, however, banks below the top 1,000 in assets posted the fastest growth rates for total assets and deposits, according to a recent study published in the Federal Reserve Bulletin. Small banks earned more on assets than their huge competitors. They also posted higher net interest margins Ė an important measure of profitability defined as the difference between rates paid on deposits and those collected on loans (see chart).
|Interest margin is the difference between the interest rate a bank pays for deposits and the interest rate it charges for loans. Historically, small banks (defined as those with assets of less than $1 billion) have reported wider margins than large banks, meaning the small banks have borne more credit risk than banks with assets of more than $1 billion. But as the banking industry has grown more competitive, the difference has narrowed.|
Small-bank executives cite several reasons for their competitiveness: They cater to markets that large banks have traditionally neglected or ignored, such as minorities, small businesses, rural communities, and inner cities; they provide faster decisions on loans and more flexible terms; and they dote on customers.
Many small-bank executives are willing to negotiate the terms of a loan guarantee or forgo it altogether. Nearly 25 percent of community banks either make non-guaranteed business loans or plan to do so, according to a recent survey by the American Bankers Association and ABA Banking Journal.