Historically, it is the community bank that we turn to; it’s where we deposit our life savings, keep our checking and savings accounts, and arrange for loans. These community banks have been, and will continue to be, the backbone of our banking system.
Since their inception, community banks have acted as the driving force behind the development of small and mid-sized businesses from major cities to rural areas across our country. Unlike large bank centers, community banks perceive their success directly linked with that of their community’s businesses and individual customers. Unfortunately, tough economic times and mortgage crisis have led to the closures of some of our trusted community banks.
Our current economic challenges are related to the subprime mortgage fiasco of 2007, which was caused mainly by “Wall Street” who did not put into place sound risk-management processes, by Government regulators who did not efficiently supervise these processes, by the rating agencies’ models which were flawed, and by investment bankers who allowed complex derivatives to be released into the financial market. The mortgage crisis was also attributed to borrowers who obtained mortgages under phony pretenses, to unregulated mortgage brokers who took advantage of unsophisticated buyers, to homebuyers who wrongly assumed that housing prices would always rise, and to human greed and incompetence.
Normally, a bank accepted deposits from individuals and businesses and makes loans to these same customers. Revenues from net interest margin (NIM) and service charges cover their cost and tax and generate profit. I remember there was a time when I was a part of ALCO Committee and were looking at about 7%-8% in Net Interest Income. Now you’d be lucky to get about 4% NIM. Which means a bank has to make twice as many loans to get to same Net Interest income? Of course many banks that had to deal with large loan problems and large provisions for loan losses did not survive.
The new banking regulations have lead to the tightening of lending standards. In the new Dodd Frank financial reform law, a small business loan has to fit under a standardized set of criteria and a particular mode. However, it is my belief that the FDIC examiners should look at community banks as a unique entity and allow them to make decisions at their own discretion.
Community banks offer great opportunities to businesses working in the current economic challenges and play a major role in community development with the local businesses’ expertise and trust of their customers. Both banks and businesses benefit from this relationship.
The current recession has been especially difficult for a number of community banks, but it brings new opportunities for far more. Down markets often present community banks with unique opportunities. By striving to serve their customers’ best interests without drifting from conventional practices, some community banks have been able to increase deposits, acquire new customers, enhance their status in the eyes of customers, and sustain stable financial statements. Community banks realize opportunities are available to them today, which were not available in the last several decades.
In order to make sure that they can maintain this optimistic momentum, community banks should continue to build on their strengths, utilize the online channel for sales and marketing efforts, continue to target the small business sector, expand their product portfolios, and leverage technology to the fullest level.
It is in our best interest that our community banks continue to prosper, so we can enjoy the benefits of their successful risk-averse business models.
Yusri Zaro, started out as an electrical engineer, then after acquiring his MBA in finance from California State University he worked for Hong Kong Shanghai Bank, Arab bank, Saudi British Bank and Bank of America, as an international corporate banker. Upon returning to the U.S., Yusri settled in Virginia and became a college professor. In 2010, he joined the faculty at ASU’s school of business as an assistant professor, where he currently teaches banking and finance courses.