About ten years ago, Charles Mark Hall, a Raleigh, N.C.-based advisor, started linking up with local community banks in North Carolina and offering the customers there financial advice. It’s not always easy to get business that way. According to Hall, clients often have a misperception that community banks don’t have the resources to offer them complex services. He thinks that as a result many of them prefer big, well-known banks.
That’s changed in the last 18 months or so. Since then, Hall has noticed a lot of new faces coming into the 10 or so community banks he works with. “Not only are we seeing new people come in now, the existing community banking customers are seeing more value in knowing their bank is not in the same trouble the big banks are in,” Hall says. That’s good news for Hall who gets about 60 percent of his advisory business from the community banks with which he does business—most of the banks he works with have between one and 20 branches and less than $500 million in assets. “There are a lot more people willing to walk in now than two years ago. These people always felt there was safety and security at their big banks. Now they’re giving the community banks a chance,” he adds.
For financial advisors who work with local banks, it’s a great time to win new business. Community banks are holding their own in this difficult financial market and reeling in new clients. In February, the Aite Group, a Boston-based research and advisory firm focused on business, technology and regulatory issues facing the financial services industry, conducted a survey of 743 community banks. Some 57 percent of them reported an increase in new retail customer acquisition during the third and fourth quarters of 2008 compared to the first half of the year. And 47 percent saw an increased level of new small business clients for the period. Meanwhile, 55 percent of community banks said they have seen an increase in deposits as a result of new customer acquisition. Just 17 percent feel challenged by the withdrawal of deposits by customers.
According to Kehrer-LIMRA, a bank consulting firm, of the 16,000 advisors working in banks, less than half are in community banks. Kenneth Kehrer, Ph.D., founder of the firm, says community banks tend not to license their employees to sell investments. Most community banks work with third-party broker/dealers’ reps to get financial services for their clients. “Overwhelmingly, the clients of those reps are customers of the banks. Generally, the progression is that community banks gets the customer and advisors get a good opportunity to gain that client for financial advice,” he says.
“All financial institutions are facing their own challenges right now, but I think community banks are seeing a lot of opportunity right now. They didn’t get as involved in sub-prime loans, they’re a lot more risk-averse and they’re in a much better position to take advantage of customers who are frustrated with the problems at large banks,” says Christine Barry, a research director with Aite Group and author of the report.
There are nearly 8,000 community banks with over 50,000 locations in the U.S., including commercial banks, thrifts, stock and mutual savings institutions. They constitute 96 percent of all banks, and their assets range from less than $10 million to a few billion dollars, according to the Independent Community Bankers of America, ICBA, the lobbying group for community banks. ICBA says the majority of community banks are “safe and sound,” and unlike big Wall Street banks, did not engage in the risky practices that led to the current financial crisis.
“Community banks are well-run, well capitalized, tightly regulated and more risk-averse than big banks. In spite of the trouble on Wall Street, community banks remain committed to taking deposits and making loans on Main Street,” the group says.
Many community banks feel, in fact, that they’re being treated unfairly by the federal government. The local banks say they were not the ones responsible for the financial mess, but they are being dealt with in the same way as the banks that did cause it, they say. “Community bankers are struggling under new regulatory burdens, and are being harassed by overly zealous examiners taking out their frustrations on banks too small to fight back,” says Camden R. Fine, ICBA president and CEO.
Of course, community banks have not been completely immune to the mistakes made on Wall Street. So far in 2009, there have been 25 bank failures compared with 2 bank failures at this time last year. The majority of those are community banks, but Aite’s Barry says that’s only because the community banks represent a greater share of total U.S. banks. “Because of the sheer number of community banks out there, a greater number of have failed,” she says.
Hall, the FA who works with local community banks, believes it’s the reputations of small banks that will win clients over. “Small business owners especially are now seeing that community banks can offer the services they need. A coffee shop owner might need a $15,000 loan or a light manufacturer might need $2 million. Most community banks can provide that, and the business owners are giving them a chance.”
