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For community banks, it’s a wonderful opportunity

Hometown-brewed “craft banking” coming back into vogue

America’s taking a fresh look at Main Street, says community bank investor Joshua Siegel. spirit of america / America’s taking a fresh look at Main Street, says community bank investor Joshua Siegel.

In the 1946 movie It’s A Wonderful Life, George Bailey runs the local building and loan. In contrast to his foil, Mr. Potter, George personally knows and cares for his loyal customers. He helps them secure homes, start businesses, save for retirement, and achieve the American Dream.

Before you dismiss this as an outdated piece of nostalgia, fast-forward to 2013. Over 6,500 community banks abound across the country. The lifeblood of many small towns, these banks represent 98% of all American banks. They foster deep community roots, funding an astonishing 60% of all small business loans. And yet—because they control a comparatively low 18% of the country’s banking capital—there is an enduring perception that they’re insignificant and obsolete.

Not unlike the Bailey Brothers’ Building & Loan, the community banks of today face an uphill battle, marked by overbearing regulation, a shortage of fresh equity, persistently deflated interest rates, and other challenges.

The good news?

Community banks are finally poised to enjoy some well-deserved time in the sun. We’re at a unique moment, when shifts in culture, policy, and technology are coming together to create a long-awaited golden opportunity.

All things local and small

Once upon a time, the foreign exuded “exotic.” Certain things were available only in specific locales, and this made these things both valuable—and magical.

Then, along came affordable plane fares, followed by global couriers, jet-setting entrepreneurs, and the internet.

Indian silk? Chinese porcelain? French perfume? Click, click, click—it’s at your doorstep in a few days.

In parallel, one-of-a-kind became one of a million. Small batch production all but vanished, giving way to mega-stores hawking goods “Made in China.” While this lowered prices, it also meant that objects lost much of that original magic. Over time, big box stores dealing in bottom-barrel prices pushed out local artisans and mom-and-pops. Cookie-cutter replaced color, making one store, one item, one household seem like the next. 

Globalization and mass production had an unintended effect. They sent the pendulum swinging in the other direction. Because the foreign is now commonplace, because mass production equals monoculture, people are turning to—and celebrating—what’s local.

The evidence is everywhere.

Craft beers—brewed nearby—are all the rage. Buyers seek food that’s traveled 50 miles—not 5,000. The word “artisanal” now commands a premium.

After binging on big brands, Americans—regardless of age, political leanings, geography, or income—are rediscovering what their own communities churn out. By the looks of things, they’re having a great time.

The question is, how can community bankers tap into this?

How can they re-conjure themselves, leveraging the trend to their advantage?

Great news: emerging opportunities in policy and technology put the wind at their backs.

Finally, tech is cheap

One major advantage of big banks is their swanky features. Far beyond ubiquitous ATMs, mobile and online banking platforms allow customers to do everything but pet their dogs. Fortunately for community banks, the tides are turning. Technology is getting better, both faster—and cheaper.

As technology costs plummet, more local banks are finding they have the resources to go toe-to-toe with big banking technology. In fact, those turning tides are coalescing into a tidal wave. Within 24-36 months from today, nearly every neighborhood bank will be able to afford to catch up to their national counterparts. Community banks, with their superior customer service, can now offer the same convenience as big banks.

If you run a community bank, all you need to do is figure out how to prioritize. Adopt the technologies that consumers love, then market them to a captivated public. Follow the lead of big banks; don’t worry about coming across as aggressive.

As Fannie & Freddie shrink, local banks poised to grow

When the subprime mortgage crisis hit, the U.S. government took control of Fannie Mae and Freddie Mac, injecting them with a collective $188 billion in capital. The twin institutions have long guaranteed the 30-year fixed-rate mortgage that enables so many to own homes. Fannie and Freddie currently back over 90% of all mortgages in the U.S. But after nearly 80 years, this era is beginning to come to a close. 

Lawmakers are intent on shrinking Fannie and Freddie, ceding more of the mortgage market to private capital.

This is where neighborhood banks can gain ground. Not only do you know local borrowers, you’re privy to their actual behavior—not to algorithmic predictions.

A Wonderful Time

Walk into any community bank. Chances are, the teller knows your name. Look to the left, and there sits the owner himself, the same one that underwrote your first mortgage, way back when your high school-aged daughter was a baby. Because of that, he knows you’re a safe risk for the college loan you’re here to apply for. And he’ll probably give it to you.

And so it goes. At the end of It’s A Wonderful Life, George Bailey’s neighbors bail out Bailey’s B&L with their personal savings. That’s the real value of community: friends and neighbors looking out for one another.

Community banks and the families and businesses they serve form a mutually beneficial relationship, lifting each other up. All that’s left is for your hometown bank to embrace its true purpose.

Let the public know: Invest in banks that invest in you.

Joshua Siegel

Joshua Siegel is CEO of StoneCastle Financial Corp., and managing partner and CEO, StoneCastle Partners, LLC. He is an expert and investor in the community banking industry and is often quoted in  financial media. In addition, he speaks frequently at industry events, including those hosted by ABA, Conference of State Bank Supervisors, FDIC, Federal Reserve Bank, and SNL Financial. He also serves as Adjunct Professor at the Columbia Business School in New York City.

Prior to co-founding StoneCastle Partners, Siegel was a co-founder and vice-president of the Global Portfolio Solutions Group at Salomon Brothers/Citigroup Global Markets, a group organized to finance portfolios of financial assets for corporations and to invest in the sector as a principal. He later assumed responsibility for developing new products, including pooled investment strategies for the community banking sector.

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