As American as apple pie and community banks
The term “Community Bank” is an iconic cognomen in banking. It refers to smaller financial institutions serving a relatively well-defined community, town or city. Essentially, it means small town banking with all of the inferred values of a Norman Rockwell painting.
Because of this, it’s about as American as apple pie; there are a lot of pretty big banks that like to call their institution a community bank, because of the resonance they feel it has with their customers. Community banks have the reputation of being involved in all aspects of the home towns, with a friendlier approach to business and more flexibility in helping borrowers.
The big banks do a pretty good job on the friendly side, and they go to great, sometimes amusing, lengths to show that they’re a member of the home team. For example, they commonly call branch managers “president,” as in Mega Bank of the Midwest, East Podunk president. If the institution happens to have just one branch in, say, a bunch of counties, the title can be “regional president.”
Way, way back in the last century, when I got made a manager of a dinky little branch for a Denver thrift, the boss called me in and said, “We’re not going to give you a raise, but we’ll give you something better: a title — branch manager. I was ecstatic; if he’d offered to make me Applewood president, I’d probably have taken a cut in pay.
Back in the day, there was a big difference in big and little. The local bank and savings and loan were where a borrower with a unique profile could get financing because of the bank’s knowledge of local conditions and properties. Not anymore: All banks are judged by regulators based on the same set of criteria. Loans that examiners wouldn’t have blinked at in 1990 are now classified as “sub-standard” by the gimlet-eyed grinches.
This means that an important, possibly even vital element in fueling the economy has been eliminated. But it doesn’t necessarily mean that small home town banks are dead. An article in the last issue of “Consumer Reports” extolled the advantages of doing business with a small bank.
There was a time, not long ago, when being a stockholder in a small bank was a pretty sweet investment, primarily because someone, big bank or holding company, would probably come along and pay as high as 3.5 times book for the hometown business (and then promptly turn it into a branch, so that much of the value which they paid, or overpaid, for was obviated).
Not so now. A lot of money people are counseling capital not to get into banking. Still, the community banks are still in a surprisingly strong competitive position. One reason is that, although the range and flexibility of decision making is severely curtailed, those decisions are still made at the local level. If you talk to the President of First National of East Podunk (as opposed to the branch manager of Mega Bank, et. al.), you’re talking to the bona fide top person.
It’s probably good to be a community bank today, but it’s not good to think like one. So much of the culture of a small bank is stalled around 1958, with Edsels in the parking lot. There’s an image in the minds of management and directors that definitely doesn’t fit this particular time in the 21st century.
For example, hometown banks in small towns and cities should be originating most of the home loans in their trade areas. They’re not. Loyal depositors are going to big banks and mortgage brokers get new loans and refinance old ones. Many small banks that are struggling to turn a profit in the new restrictive environment for traditional bank lending are declining to take advantage of a profit center they could capitalize on, virtually overnight.
Those of us in the business are finding that it’s, well, sort of OK to be a banker, but it can be very hazardous to the financial health of your bank to think like one.
Pat Dalrymple is a western Colorado native and has spent almost 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is email@example.com.
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