NorthBay biz explains how, even in today’s economy, Marin-based community banks are thriving.
No business or industry has been as directly affected by the economic downturn as financial institutions. So in this market where even giant, multinational firms are crumbling, how are the little guys supposed to cope? Local banks in Marin have been forging on the old fashioned way—by knowing their customers, being involved in their communities and making smart decisions when evaluating risk.
For Marin-based community banks, this means staying true to what they’ve been doing all along. There’s been no need to overhaul the businesses or create new strategies or service offerings to ensure survival. All those interviewed actually reported an increase in deposits in 2008.
“I don’t think community banking has really changed,” says Mark Chapman, senior vice president and chief marketing officer of San Rafael-based Tamalpais Bank. “At our bank, we’re really prudent on our expenses, the investments we make and the technology we bring, so that hasn’t changed. We’ve always been focused on our expense management and on credit risk, so while the [current] economy has brought more focus to those factors, I don’t think it’s changed the way community banks have operated.”
Make it personal
A key component in the success of local community banks is strong and lasting customer relationships. Chapman uses the analogy of an old time general store: “I’ve compared the community bank model—and Tamalpais Bank, specifically—to that of a general store in the old days,” he says. “You know the person behind the counter by name and, if you have a special order, you know that store owner is going to get you what you need. That’s how we do business here.”
So how can a bank, or any other business for that matter, really get to know its customers? One way is by providing excellent customer service and taking the time to ask what customers’ needs are and how your business can best accommodate them, but another way is by getting involved in the community. This can mean a lot of different things, but for community banks, it means honoring local nonprofits through donations of time, money (among those interviewed, a combined amount of approximately $450,000 was given last year) and leadership, staying up-to-date on what’s happening in the local community, and continually surveying customers to ensure their needs are still being met.
Being connected to the community lets these banks be proactive in determining where people need them most, versus waiting to react.
“Working at a community bank, we can ‘feel the road,’ because we’re connected to the community,” says Chapman. “We can feel the straightaways, the bumps and the turns. That really is a benefit to working in the community. For example, as part of my job, I talk to nonprofits every day. So we get a good sense of what’s going on at least in that area of the business community. That helps me in my job as I develop products or marketing strategies. For example, one nonprofit was documented in the media that they were having some funding problems. So we accelerated our planned donation to them and helped them with some funding in January [instead of holding off until later in the year].”
Success factors
Just as important as banks getting to know their customers is customers getting to know their bank. A relationship goes both ways, and it’s important for people to do their due diligence in making sure their bank fits their needs—both current and future.
“It’s really important for everyone to know their bank,” advises Russell Colombo, president/CEO of Novato-based Bank of Marin. “Spend the time to understand how your bank is structured and what potential risks it carries in its portfolio. You can get that in the annual report or the 10-K [a federally required annual report]. The information is there. Unfortunately, not everybody understands how banks are structured.”
Another success factor for community banks has been hiring experienced business bankers, who come from other banks, large and small, and other disciplines. This has resulted in many community banks having an entrepreneurial environment, which, in turn, has been good for customers—and good for business.
“Our CEO, Mark Garwood, the entire executive staff and the board have created a great work environment so we’ve been able to attract very senior level managers from large financial services companies or other community banks,” says Chapman. “As a group, we’re willing to invest in these senior staff positions, because we know it’s going to deliver to our customers.”
Last but not least in the formula for success is being “risk-smart.” That is, conservative growth coupled with a focus on core competencies. President Barack Obama may be encouraging this next phase in our nation to be the “era of responsibility,” but local banks have known—and followed—this mantra all along.
“Community banks have, by and large, stayed away from subprime lending and all that mortgage crisis,” says Kim Kaselionis, president/CEO of Novato-based Circle Bank. “If you look at the financial performance of community banks in the North Bay, many of them aren’t only reporting positive earnings, but an increase in earnings and in loan growth.”
Colombo agrees: “It’s a strategic approach to business. It’s the way we’ve always operated,” he says. “We made the strategic decision to not compete in commodity business, such as residential mortgages. Most people who have a house and refinance it go to a mortgage broker and get the best deal. That’s not about a relationship, that’s a commodity—that’s a volume business that’s driven by price and has small margins. That doesn’t make any sense for us, because Wells Fargo, Bank of America and all the other mortgage lenders have such large volumes.
“We work with small businesses and provide lines of credit and financing for commercial real estate, for example, where we can add value beyond just making a loan. We can help come up with solutions that fit their financing requirements. [One of our keys to success has been] conservative, consistent underwriting of loan portfolios. We haven’t done crazy things. We’ve been consistent with our approach to underwriting loan transactions. And so while, maybe in the past, people have said, ‘They’re too conservative,’ we’ve been consistent. This is the quality we require to do business, and if you’re consistent in applying that, you’ll be successful over time.”
As testament to Bank of Marin’s success, the institution was recently honored with an Award for Excellence by the Petaluma Chamber of Commerce, where the bank has three branches.
Face-to-face
Ironically, even though community banks have historically taken a more moderate risk profile, they nevertheless are able to make loans that some bigger banks won’t engage in, because of the personal relationship component. Especially in this economy, even those with good credit at large banks have been adversely affected through decreased equity lines and credit limits that have been lowered or shut down altogether.
“Not only do the large banks have all of these mortgage problems to deal with, but there’s also a tremendous amount of consolidation,” says Kaselionis. “So they have marriage challenges they have to deal with, and when any financial institution has loan problems or other activities that are outside of their core business—which is servicing customers and underwriting new loans—they just don’t have the time. The large banks don’t have the opportunity to really sit down and analyze particular credit files on a one-on-one basis. Their setup to approve loans is formula-based; it’s all or none. So what happens is, they just shut off lines of credit, sight unseen. Customers with good credit and good payment history have been adversely affected by what’s going on in the global market.”
By having a more personal relationship with customers, community banks are better positioned to work more with them in difficult times, which can minimize loan defaults and other negative consequences. “[The economy] affects everyone,” says Kaselionis. “We have a lot more activity just working with borrowers and helping them through difficult times, such as layoffs and slowdowns in the economy. The credit contraction will have a trickle down effect. It’s a downward spiral, and community banks are doing what they can to help keep customers current by modifying loan terms, whether it’s allowing temporary payment deferments or interest-only payments, or a maturity extension—whatever they’re able to do to help people stay positive from a credit perspective. The last thing we want is for all of our loan portfolios to unravel because we weren’t proactive enough.”
Kaselionis goes on to explain that the “Five Cs”—character, capacity, capital, collateral and cash flow—were traditionally used to determine credit worthiness. Over the past years though, four of those five were disregarded, and all faith was put on collateral, which, as we’ve seen, has led to the demise of many banks. However, community banks have always relied on all five Cs in underwriting loans. It may have lost them business in the past, but it’s ensured their success in the present.
“We wanted to help educate the business customer who may have been at a larger bank in the past, when perhaps it was a lot easier to get credit,” says Kaselionis. “You didn’t have to produce the documentation that’s necessary in a traditional underwriting procedure. I think it’s valuable for banks to sit down and educate customers on what it’s really like to sit on the other side of the table.”
It might just be this conservative nature that’s ensured community banks’ success during this economic crisis. During this time of economic uncertainty, it’s nice to be able to call your bank with a problem and actually talk to a real person.
“In a time of recession or times of national distress, all of us like to hunker down and retreat to the center, if you will,” says Chapman. “With banking, what’s been happening nationally is that people want to do business with people they can see, feel and touch. That’s where a community bank has an advantage.”
Community outreach
Another benefit of not having to spend all your time and resources struggling to survive is that assets can be spent improving and expanding business services and getting that much more involved in community affairs and programs. It’s what Chapman likes best about working in a community bank—the opportunities to make a positive impact for nonprofit and for-profit business customers.
“About a year and a half ago, we realized no one was promoting financial literacy among teens and students in the county,” says Chapman. “So in conjunction with Visa, we put together a financial literacy program called ‘Practical Money Skills for Life’ [see “The M Word,” Nov. 2007]. Programs like that serve a greater good.”
“It’s a real community that thrives on keeping it local,” agrees Colombo when asked what he likes best about operating in the North Bay. “This county supports its own: We give to the community and the community gives back. That’s exactly our philosophy, and because of that, we can compete against the large banks. In Marin County, there’s a very strong sense of community.”
Probably one of the biggest challenges for Marin’s community banks is continuing to succeed in a stagnant market.
“When you look at Marin County, there’s less than one half of one percent population growth in an average year,” says Colombo. “It’s a no-growth community, so you have to find ways to grow in that market. That means taking business from others; obviously that’s a challenge. The way we meet that is by continuing to add new products, expanding the relationship with our customers and increasing our market share. There’s wealth accumulation in this county, which is the good news, but not population growth.”
Given how well Marin’s community banks have been doing despite the economic crisis, can we expect them to play a bigger role in our communities? Yes, says Colombo.
“It used to be that people would say, ‘A bank’s a bank,’ says Colombo. “But now, they’re realizing the value a good bank can provide—and the value that a relationship with a banker can provide. I think it’s more important now than ever to have a personal relationship and understand what your bank is doing.
“The local flavor of a bank is really important. A bank in a local community should know that community and should understand the risks of doing business there. If you’re scattered all over the country, I don’t think you’re able to focus as much on each local community. So I think in the future, community banks are going to play an even bigger role in the financing of small business. And, frankly speaking, I think small business is what will bring us out of this recession.”
The success that local community banks have enjoyed can be a lesson for all of us in proper risk management, superior customer service and what it means to know your customer and the community in which you operate.
