Small-business lending has long been in the wheelhouse of community bankers.
The argument has been that small banks have a knack for delivering the personal service craved by entrepreneurs and other mom-and-pop operations, making it a reliable line of business.
However, community bankers have lost a surprising amount of ground to larger competitors in the last few years.
A recent study by the Federal Reserve and the Conference of State Bank Supervisors found that loans to small businesses fell by 2.2% from 20014 to 2016 at banks with less than $10 billion in assets. At the same time, larger banks were able to increase the size of their portfolios by roughly 11%.
As a result, banks with under $10 billion of assets have gone from a healthy lead in this category to a notable deficit.
The heads of small banks are determined to stay competitive and seemed confident about doing so. Three of those CEOs — Luanne Cundiff at First State Bank of St. Charles in Missouri, David Hanrahan at Capital Bank of New Jersey in Vineland and Pat Hickman at Happy State Bank in Texas — shared their plans during a panel discussion at American Banker’s recent Small Business Banking conference in Austin, Texas.
Here is an edited transcript of the discussion.
How do you view your bank’s role in small-business banking?
DAVID HANRAHAN: While I’m never going to be on the leading edge of the best technology or the newest data collection, I think community banks have such a competitive advantage in terms of our flexibility and nimbleness. Our small size, believe it or not, is a strength. We can run circles around the sometimes bureaucratic processes of larger organizations.
I hear some of my colleagues at larger organizations talk about the need to standardize the way credit is underwritten across a multistate footprint, and I have to tell you that, competitively, I love to hear it. When big banks standardize things and make rigid rules, that’s where little people like me shine. We can be flexible and treat every customer individually. We lend to imperfect business owners. Not one of them is going to tick off all of the boxes. We’re really good at bobbing and weaving and adjusting to individual customer circumstances.
I think technology is important, though. We have to keep up with the technology that is out there because our customers are going to demand it as time goes on. … But I don’t think we have to be on the leading edge of it. Our smallness is a big competitive advantage.
LUANNE CUNDIFF: One of the benefits we have in our industry is the fact that we bring such diversity from the perspective of the size and structure of our institutions. … There are great benefits to having large organizations to provide the services we can’t provide. The niches we have are so different. That’s what makes our industry so great.
In terms of technology and millennials … I used to hear growing up that my generation would never talk to people or go to a bank branch. I think the millennial group … needs human interactions, particularly as they’re growing up, whether they’re entrepreneurs or taking over a family business. We can provide that relationship. At our bank we try to find people that like that human touch. From a small-business banking perspective, we have a core group of customers that want and need that.
With that said, one of the important elements for banks of our size involves keeping up with technology, particularly as it pertains to the payments system. I think that is an area that, regardless of who you’re working with, the real-time payments, bill pay and ACH are what they will demand. That will be a critical element for community banks.
PAT HICKMAN: I make my officers write letters to the CEOs of Chase, Wells Fargo and Bank of America every year to tell them what a wonderful job they’re doing and not to change a thing. We love competing against the big guys. ... When we moved into Dallas-Fort Worth five years ago some people urged us to change our name from Happy State to something more bank-like. Instead, we have found that people like relationships. Today, we have $500 million of loans in Fort Worth. We haven’t bought anything. We like spending time with our folks. Whether it is a small town or a large city, we like relationships. When we talk about their money, [customers] like to know the people who will be standing next to them when times get rough.
How do you take relationship-building to the next level?
HICKMAN: You have to get out on the streets and knock on doors. There’s no greater compliment to someone than to ask them about their business. To them it is like their baby. Ask them about it sincerely. People love to tell their story.
Our officers will, one to three times a year with their better customers, invite their attorney, accountant and insurance agent over to the bank for a lunch meeting with the client. Let’s take the thumb off the clock and not charge them any money. Let’s just talk about how to help them do better. The customers love having the focus on them.
CUNDIFF: The St. Louis metropolitan area is very entrepreneurial. Whether it is a millennial entrepreneur coming in to try and get started, or someone looking to take over a family business, we try to make a connection. Sometimes the communication is different. I get messages on Facebook sometimes, which is strange but it happens. We’re seeing that you can use technology, but you must also have that personal conversation. … We try to build relationships with lawyers and our clients to get a 360-degree view of the client. You use different tools.
HANRAHAN: Accountants are a tremendous source and influence for referrals. That’s why we have three CPAs on our board. … They don’t refer us business because we have the best online platform. They refer us because they think we’re good people who are flexible, trustworthy and can be a reliable source of credit for their client.
The vast majority of our small-business customers are with us primarily because of the credit component of the relationship. Even for those who have more money in the bank than what we lend them. Having that line of credit and a partner that they believe is going to be there for them in great times and not so great times is the primary driver of attraction and stickiness for our relationships.
At the same time, you’re trying to deepen those relationships, right?
HANRAHAN: Of course we want to do that, but we’re not ashamed to say no, we’re not the right organization for that. For example, if somebody calls me about a credit card for their company, I’m going to tell them to call Amex because they do a great job with that. If somebody wants a residential mortgage, I’ll call Luanne or someone in my market because that’s just something I’m not good at.
We’re not ashamed to just stick to the couple of things that we’re really, really skilled at. Those things are lending to small businesses and providing a very friendly hometown feel in our branches. There’s a lot of talk in our industry about maximizing share of wallet, and I get that. But I still want to be great at what I do with my customer and not leave a bad taste in their mouth over one piece that I’m not necessarily the best at.
CUNDIFF: Sometimes you can’t be everything to everyone. We’re not ashamed to refer clients to another financial institution that can do a better job with something that we don’t focus on. That being said, we have a pretty large mortgage lending division. We’re great at small-business lending. But our platforms are vastly different in that we are relationship-based on our business platform and more transactional on our mortgage platform. That doesn’t mean we don’t build relationships [in mortgages], but we had to make it very standardized because of the compliance burden imposed on residential lending.
HICKMAN: We know you have to have strong technology. One of the real beauties of mobile banking is that once you get a customer to like [your bank], you never have to lose them. No matter where they move they can take advantage of your services. We see a lot of that. We try to stay up to date. … We’re competing with the Chases, the Bank of Americas and the Wells Fargos of the world.
Any thoughts on hiring and retaining talent?
HANRAHAN: It’s a big issue. The big banks don’t have the credit training and management training programs that they once did. That was a feeder for our industry. And given the black eye that the industry gave itself in the aughts, there aren’t as many younger people who aspire to be a commercial banker. Of course, the incumbent banks have their arms wrapped tightly around the best people, and it is hard to pry them loose.
We’re dealing with it by, to some extent, growing our own [talent]. If we have a good, young, smart person we can bring into our organization as a relationship manager — we’ve had some success with that. Also by building a reputation as a bank where lenders can get stuff done for their customer. That’s what lenders want to do. They want their customers to feel like they were there for them. They can’t always do that in certain organizations.
CUNDIFF: Not only did we receive a black eye during the financial crisis, but we continue to feel those ramifications. Baby boomers are leaving a big hole as they start to retire. There are other banks that are having even bigger problems than we are because people in their towns don’t want to work at a bank or, if they do, they aren’t skilled enough to do it just yet. So they’re having to grow their own.
The American Bankers Association is working on a program to try and figure out how to get banking curriculums back in the universities. For instance, the university I graduated from had a banking curriculum. I don’t think they have one today, whether it is for budget reasons or the students coming to college don’t know that banking is a great profession. The movies that they see about the financial crisis are all about the big, bad banks. That sways their opinion on what they want to do for a living.
We need programs at the college level, and even the high school level, to try and plant the seed that a banking career is a good career. That’s the only way we can address the problem. It has to be done from a grassroots level.
HICKMAN: We have a very strong credit training program. We really have made good use of that. One of the markets we’re in has about 800 people, but we’ve got good bankers there. We’ve done some unique things. We found an eighth grade math teacher who had been teaching math for 20 years and gave him a new career. … We like to find those kind of folks.
Let me share a story from Drayton McLane, who used to own the Houston Astros before they won the World Series. At one time he was the largest stockholder in Walmart whose last name wasn’t Walton. … He gave me the greatest advice for getting people to come to Amarillo. First, you have to pay them what they’re going to earn in the big city. That’s how Walmart attracted the best talent in the world to Bentonville. He also told me to cast a job as being too big for the candidate you’re talking to. People who are worth their salt like a good challenge. I have used that tactic and I will tell you that it works well.