It’s not surprising that Ted Peters has friends in the banking business. But one of those relationships has become a stark illustration of the difference between his community-based operation and the national and global megabanks people love to hate.
“I had to call a friend who worked at Wells Fargo, and it was a personal matter,” says Peters, the president and CEO of Bryn Mawr Trust.
“I knew where he worked and everything, but I couldn’t get him. Every time I called the number, I’d have to hit more buttons, or put in a password or a code or an account number. And if you don’t have one, you get kicked somewhere else,” he says. “I know exactly where he works; I know the building he’s in … And I can’t get him.”
Did Peters bemoan his friend’s situation? Not quite. “I loved it. They’re so bad—they really are,” he says, laughing. “You can get somebody pretty quickly when you call our banks, because that’s what we’re selling: service.”
Regardless, today’s community banks have been left to contend with customers’ lingering anger and multiplying federal regulations over something that wasn’t really their fault. “Too often, when public officials are speaking, they speak of bankers in a universal way, not realizing that they’re really not talking about Wall Street, they’re talking about all of us,” says Bill Latoff, chairman and CEO of Downingtown-based DNB First. “It’s had a detrimental impact.”
Chalk it up to almost a decade of suspect behavior by the biggest banks in the country. By now, the story should sound all-too-familiar: In 2008, after years of creating complex, artificial, downright dicey loan instruments designed to maximize profits, the largest financial institutions in the country found themselves in a bit of a pickle.
The problems started as early as 2006, when the housing market—driven by historically low interest rates and federal pressure to expand home ownership—shattered under the weight of extensive lending at sub-prime rates. Many of those suspect mortgages were then bundled together and traded or sold to other banks for a quick, high return based on the assumption that home values would continue to rise.
When they didn’t, real estate values around the country plummeted, with the most visible damage seen in what had become overvalued areas like Las Vegas and much of Florida. Many homeowners defaulted on their mortgages. As a result, the values of those bundled loans plummeted. Between June 2007 and January 2008, six international banks had declared losses between $5.5 and $18 billion. By March 2008, Bear Stearns, the fifth largest investment bank in the United States, had
collapsed and was taken over by JPMorgan Chase & Co. Failures and buyouts of banks continued, and job losses related to the financial industry skyrocketed.
In October 2008, after weeks of wrangling over how to help keep the disaster from spreading, Congress passed a $700 billion bailout of the U.S. financial industry, citing the need to rescue institutions deemed “too big to fail.” It was a striking moment for consumers. Home values collapsed. Investors, who depended on that vigorous mortgage market for dividends, saw portfolio values plummet. Many who got into their homes using those aforementioned exotic loan instruments saw their interest rates balloon and were unable to make their monthly payments.
For banks of all sizes, the crisis resulted in tons of animosity aimed in their direction. According to a July 2012 Gallup poll, consumer confidence in the banking industry is at a record low. Such rampant distrust has been particularly hard on the little guys.
National news stories have largely focused on the contraction of the credit market and the ensuing inflexibility of big banks. “Folks across the board are refocusing on improving their own household balance sheets, not leveraging themselves as much by taking on consumer debt,” says Paul Merski, executive vice president for Congressional relations and chief economist for the Independent Community Bankers of America. “That’s a natural reaction to a deep recession.”
As the demand for credit from small businesses has plummeted, community banks—with typically less than $10 billion in assets and whose primary deposits are made by nearby businesses and consumers—can’t make enough loans. Combine that with low federal interest rates (minimizing the spread between the fed’s rate and what you can lend at), and the situation is precarious. “They’re kind of teetering on the edge of profitability in the recovery,” Merski says.
Meanwhile, much of the bailout money went to buying stock in failing institutions, propping them up to prevent further domestic and in-ternational financial disaster. While much of that stock has since been bought back, federal intervention also resulted in significant legislation being passed in an effort to regulate the banking industry. The Dodd-Frank Wall Street Reform and Consumer Protection Act is perhaps the most well-known of these. Among other things, it was designed to ensure the protection of consumers, end bail-outs, and guarantee transparency and accountability.
But, with many regulations aimed at the big guys, legislators didn’t anticipate the problems for community banks. New legislation has increased the amount of capital all banks are expected to have on hand to ensure that they don’t overextend themselves. At the end of 2012, the FDIC insurance program was set to expire, with many community banks fearing the result will be depositor flight to larger banks. “A huge issue going into the 113th Congress will be regulatory relief in the financial sector and preserving the viability of the local community bank,” says Merski. “If policies can be worked through where you finally, genuinely and honestly address the too-big-to-fail element, I believe community banks will be allowed to flourish. They know their customers and know their local communities.”
Of late, when Latoff gathers with his peers in the banking industry, questions have revolved around how to repair the damage done by the 2008 crisis. “The talk is always about, ‘What can we do to improve our reputations?’” he says.
As a group, community banks are by no means small potatoes. There are more than 7,000 such institutions throughout the United States with more than 24,000 branches, according to the Independent Community Bankers of America. They employ upwards of 300,000 people and hold about $1.2 trillion in assets. Of that, about $1 trillion is made up of customer deposits. The banks carry about $750 billion in loans, which finance some 58 percent of small businesses under $1 million and account for 65 percent of all business lending in the United States.
“It’s not cookie-cutter loans,” says Terry Jorde, the ICBA’s senior executive vice president and chief of staff. “There’s a symbiotic relationship between the bank and the community. ”
DNB First’s Latoff puts it in simpler terms: “Community banking is the heart and soul of business in this country. It’s the bloodline. It’s what keeps things going.”
The story of DNB First serves as a remarkable testament to the resilience of the community bank. Founded in 1860 at the onset of the Civil War, the bank has weathered its share of hard times. Wars, depressions, recessions and various fluctuations in the region’s economics have all taken their toll over the years. “When we’d sit around the table trying to figure out what we needed to do when this crisis hit, I’d look across at them and think, ‘You know what, if they could survive as a start-up in 1860, we can surely get through whatever we’re faced with here,’” says Latoff. “And when you think of all that we’ve been through, I’m grateful that we got through this, and that we came through as strong as we did.”
Community bankers enjoy recounting how they’ve helped an individual or a business at a time when bigger institutions had written them off—and Latoff is no different. Also woven through his tales is an obvious respect for the employees who make those transactions happen. “The board members, officers and employees live, learn, eat and sleep in their communities,” he says. “We know our borrowers. We know our customers. So, when we’re looking at the framework of a loan, and when it’s just on the edge in some cases, we can follow our intuition and say, ‘OK, this isn’t exactly in the box, but this individual has a proven track record. We’re going to take a chance.’ That’s the way you build business; that’s the way you create jobs.”
Such a symbiosis bolsters local economies. “It does result in people being customers for many years and many times for many generations,” says Jorde. “It’s about knowing the customer and being able to take those risks.”
The legacy aspect of community banking is rendered especially clearly among the many federal credit unions in our area. Congress passed the Federal Credit Union Act in 1934, with the goal of encouraging national thrift and savings through a
not-for-profit network of cooperatively owned financial institutions. For decades, these member-owned entities existed primarily within the context of specific employers. Many families can tell of parents or grandparents who financed their first car or home through the credit union at their place of business.
The appeal is obvious. Because credit unions aren’t subject to many of the taxes for-profit banks pay, they can offer lower interest rates on loans and higher rates of return on savings accounts and certificates of deposit. Their limited range and size has also contributed to better deals.
In Philadelphia’s western suburbs, the credit unions that once exclusively served workers for some of the area’s signature companies have adopted community charters allowing them to branch out and serve a broader demographic. Citadel Bank is the modern-day evolution of the Lukens Steel Co. Employees Credit Union, which began in 1937. Since changing its name in 1983 to reflect a new community charter, Citadel has exploded. These days, it boasts $1.5 billion in assets and 100,000 members.
As Citadel’s president and CEO, Jeff L. March has a pretty good idea of what draws people to credit unions. They get all the benefits of a community bank, plus the reassurance of knowing that the institution works for them, not share holders. “It allows us to focus on the long-term horizon, as opposed to a short-term horizon,” says Marsh. “We think that’s a distinct advantage.”
In his role as president and CEO of the Broomall-based Franklin Mint Federal Credit Union, John D. Unangst has witnessed the benefits of the institution’s expansion efforts, including branches at six high schools, Swarthmore College, Widener University and several hospitals. “Our goal is diverse products, but it’s also education and community involvement,” he says.
In addition, most community banks are benefitting from the growth of off-the-shelf technology readily available from outside contractors. High-tech services like online and mobile banking are no longer limited to the big boys, serving as major inducements for disillusioned megabank customers looking to downsize.
Customers Bank’s expansion into the Main Line can be attributed, in large part, to its “high touch, high tech” approach, which incorporates mobile and electronic banking with a dedication to customer service. “We can pick and choose the best tech to deliver services to our customers,” says Warren Taylor, executive vice president and president of retail banking at the Wyomissing-based institution. “The speed is better, the pricing is better.”
In the end, though, it all comes back to the human element. Bryn Mawr Trust’s Peters rattles off the many ways his staff goes above and beyond: visiting an elderly, homebound customer to help with a deposit, staying late to make sure a lost item or new debit card is delivered—the examples go on and on.
“We have more people in our branches than most big banks do because we’re trying to give that personal service,” says Peters. “I’ve always said that I’d rather have one more person in every branch than be one short in every branch.”