Internal and external analysis of community banks' performance

Abstract

This study explores the efficiency of US community banks and factors that affect it. We present a slacks-based measure model for data envelopment analysis to analyze the efficiency of 3171 community banks in the US, and then conduct a panel data analysis to investigate the factors that affect banks' efficiency. The results show that bank size, community size, and unemployment rate of the region where the community bank is located are positively related to the efficiency, whereas relative affluence of a community has a negative relationship with the community bank efficiency. In addition, community banks providing real estate loans or diversifying their loan services perform better than those concentrating on agricultural loans, which account for a large proportion of the loans provided by US community banks whose traditional role is to provide banking services to rural communities and act as major credit providers for agricultural producers.