You Can Bank On The Personal Touch - community banking - Industry Overview

Sharon Nelton

Community banks--unlike some megabanks--can offer small firms advantages such as local decision making and long-term relationships.

A year after a larger bank bought York State Bank in Elmhurst, Ill., William C. Gooch Jr., York's president and CEO for 20 years, got the ax. At the urging of a local businessman, Gooch did what a lot of squeezed-out banking executives are doing in this era of bank consolidations: He started his own bank, Community Bank of Elmhurst

Gooch's bank opened in a trailer in May 1993 with $6 million in capitalization raised from local business people. Today it has assets of $77 million and its own building.

Most important, the bank gives Gooch and his staff the opportunity to practice the kind of banking they believe in--community banking, in which bankers know customers personally, build long-term relationships with them, and become their allies, not their adversaries.

"We know the names of the dogs who come to the drive-in window" with their owners, Gooch says, adding: "If we remember the dogs' names, we certainly remember the people's names."

Gooch and Community Bank of Elmhurst are representative of a surge of bank start-ups that has been occurring in the 1990s--albeit quietly Headlines have shouted the news of ever-larger bank mergers and acquisitions, with the result that the total number of commercial banks has declined from 12,700 to 8,900 over the past decade.

At the same time, about 600 new banks have been established in the past three years, according to the American Bankers Association.

Like Gooch's bank, most of these new banks are community banks, and that's good news for small-business owners.

"Small businesses really are the bread and butter of community banks because community banks themselves are small businesses," says Jennifer Bavisotto, director of communications for Independent Community Bankers of America, an association in Washington, D.C.

Bavisotto says the ICBA has found that larger banks are taking less interest in making small-business loans, whereas such loans are "what community banks thrive on."

When Gooch was still at York State Bank, he approved a loan for Dr. John D. Jevitz when no other banker would. A newly minted chiropractor, Jevitz was trying to start his own practice and needed $9,000 to get it off the ground. But he was saddled with student-loan debt. "I had absolutely zero collateral," he says, "except for my used car and a stereo."

To make ends meet, Jevitz held down seven part-time jobs, from taking X-rays for an orthopedic surgeon to serving as a high-school athletic trainer. Gooch was impressed with Jevitz's potential, intelligence, and work ethic.

When Gooch started Community Bank of Elmhurst, Jevitz, like many other York State customers, followed him to the new bank. "I couldn't ask for anyone to be more loyal to me," says Jevitz, whose Jevitz Chiropractic Clinic has grown to serve 3,400 patients.

Over the years, Jevitz has borrowed more than $110,000 from York State Bank and Community Bank of Elmhurst. He has paid it all back, proving that Gooch's faith in him was warranted.

The Local Angle

Definitions of a community bank may differ slightly, but banking experts generally agree that it's a bank dedicated to serving the needs of its home market. Usually--though not always--that means the bank is locally owned.

"All of our members are locally owned and locally operated banks, where decisions on loans and all other banking-product decisions are made locally," says Bavisotto of the ICBA, which has 5,500 members.

Kathleen M. Murphy, director of the Community Bankers Council of the American Bankers Association, also in Washington, says: "The overriding definition that we use is that a community bank is an institution that has accountability to other stakeholders in the community"

She emphasizes "stakeholders, not shareholders," explaining that this means entities such as small businesses, the school system, the medical community, and the government, all of which need the support of a bank and can use its services.

Murphy says it's in the best interest of community banks to make sure the community is strong. "Therefore, they are constantly looking for ways to provide economic development and economic growth and jobs in their communities. For this reason, they're reaching out, looking for new opportunities for existing businesses to grow or to form new businesses."

Generally, community banks are small, with less than $100 million in assets. The ICBA says 55 percent of its member banks serve rural communities.

Gooch says that a typical small-business customer at his bank will have a credit line of $25,000 to $100,000, will carry $20,000 in a checking account, and will have a money-market account and a couple of certificates of deposit.

At Sarasota Bank in Sarasota, Fla., the majority of business customers have annual revenues of $1 million or less, says the banks CEO, Christine L. Jennings. A typical business line of credit there is $50,000.

Filling The Gaps

A number of factors have given rise to the wave of community-bank start-ups. One is the void created by bank consolidations, which frequently lead to loan and other decisions being made by bank officials who are not local rather than by bank officials who know the applicants.

Founders of the new banks--which people in the industry often call de novo (Latin for "anew" or "again") banks--saw a hunger for banks where bankers and customers know one another, where there is little turnover in bank personnel, and where decisions are made on-site.

The consolidations have made considerable talent available to start community banks. Bank executives who, like Gooch, lost their jobs in the consolidation shuffle or who, like Greg Lovell, an Idaho banker, found they didn't enjoy working for a larger bank, often gather investors--many of them small-business owners--and form a new bank.

Lovell, formerly senior vice president of commercial lending at a consolidated bank, says that working in a large bank "just wasn't what I wanted to do, so I left and looked around and decided I wanted to start a bank." He launched First Bank of Idaho in Ketchum in May 1997.

A third factor, says the American Bankers Association's Murphy, is the good economy, which has been presenting "incredible opportunities" for starting new banks.

In Illinois, the surge of community-bank start-ups "has been taking place since about 1990 and has continued virtually unabated," says Robert J. Wingert, executive director of Community Bankers Association of Illinois, based in Springfield.

Many of the new-bank founders have been "wildly successful," says Wingert. "They've taken business from their former employers, quite frankly, and they've also been able to generate some new business."

That's true not only in Illinois, where Gooch's bank is thriving, but in other parts of the country. After just three years, for example, Lovell's First Bank of Idaho has assets of $55 million and has grown to three locations. Sarasota Bank, founded by Jennings in 1992, has grown to $85 million in assets.

What do community banks believe have to offer small-business owners that their larger competitors can't? Bankers, banking experts, and small-business owners suggest the following:

Personal attention. If you call Gooch's bank, he says, you talk to a person. "One of the things that really upsets me, and evidently a lot of other people, is the 'Punch 1 if your house is being foreclosed on. Punch 2 if your car's being repossessed. Punch 3 if you're overdrawn,"' he says. "Just give me a person.

Murphy says community banks excel at personal service. "This is one of their characteristics. They will meet with a small-business owner who may not necessarily have a very tight business plan in place and work with him on the business plan and growing the business to the next level."

Empathy and understanding. Like small-business owners, bank founders are entrepreneurs. "Because we are still a new bank," says Jennings, "we have had the same experiences, the same problems, the same concerns that businesses have--the growing pains, the hiring of personnel." It took 2 1/2 years for Sarasota Bank to become profitable, and Jennings says she knows what it's like to watch the bottom line and to manage growth.

Lovell, who started First Bank of Idaho with his credit card, says he knows "what it's like to go through the stress of an extremely high growth rate."

The banks headed by Jennings, Lovell, and Gooch all remain small businesses, with about 20 employees each.

Relationship. One of the reasons that Jennings--who got into banking as a teller at age 17--started a bank was that she "just didn't see a true relationship with the customer developing with the large banks."

Gooch says customers should be able to know their banker well enough to just call him or her when they have a special need. He says his staff members will go out of their way to help customers. For instance, when one man couldn't get to the bank during banking hours to fill out mortgage forms, someone from the bank went to the man's home after hours,

David D. Shuster, chairman of the Dallas-based National Institute for Community Banking, Inc., which provides estate planning and succession services to hank owners, says: "If you're a small-business owner and you go to your local banker and he's somebody you've known your whole life, versus [a decision maker in another state], you're going to get a very good audience and the banker will do anything that he can do for you."

Lower fees. In general, says the ICBA's Bavisotto, fees at community banks run 15 percent lower than at large banks, and sometimes there are no fees at all.

Community Bank of Elmhurst generated a lot of publicity one year with its response to a large Chicago competitor's announcement that it would charge a $3 fee each time a customer needed to speak with a live teller. Countered the upstart on its outdoor sign: "We'll pay you 25 cents if you'll talk to one of our live tellers."

The Chicago Tribune, Money magazine, CNN, and other media carried the story. Gooch says his bank paid out $290.25 in quarters to people who came in and that the bank got the equivalent of $1 million in advertising.

Creativity and flexibility. Most community bankers, if they believe in a small-business owner, will go out of their way to make a loan. They won't break the rules, but they might bend them a little.

A small firm's special circumstances may "need to be creatively token care of through a certain type of loan or a specially structured lending situation that maybe a large branching operation just simply does not have the flexibility to do," says Wingert of Community Bankers Association of Illinois.

If the amount of money that a small-business owner requires for expansion exceeds the community bank's lending limits, the bank often will partner with another bank to come up with what the business needs.

Even though Gooch's bank's legal lending limit to any customer is $1 million, he recently was able to package a $2.5 million loan by bringing in two other banks.

Special services. Small banks are beginning to offer some of the services that their larger counterparts offer, such as ac counts-receivable financing and leasing services. But some community banks go even further.

Sarasota Bank, for example, provides a free courier service that picks up the deposits of small-business customers. By not having to send someone to the bank every day, a small business can gain five or six hours of productivity in a week. CEO Jennings says she's never heard of a large bank offering this kind of service, "but our customers love it."

Technology is enabling community banks to provide services that they couldn't before. Many, for example, are offering small businesses "cash sweep" accounts, which electronically transfer excess checking-account funds into a savings account, where interest can be earned, or sweep cash from savings into checking only as needed to pay bills.

"We want to use technology because I think that's the great equalizer in banking," says Idaho banker Lovell.

Although a community hank can serve the needs of most small-business owners, it can't do everything. If a business is doing a lot of international work or has $50 million or more in annual sales, it might need the services of a large bank, says Lovell.

And as warm and friendly as a community bank may be, you can't just walk in and come out with a loan to start a business unless you have a sound business plan and some other things going for you--such as the work ethic that chiropractor Jevitz demonstrated.

"Community banks are going to certainly listen very carefully, and if it's prudent to provide start-up capital, they will," says Shuster of the National Institute for Community Banking. "But the community banker, because of the banking regulations, can't give a loan unless it meets certain criteria, regardless of what he might want to do."

To determine whether a bank you're interested in qualifies as a community bank, ask who the owners are and find out if they're local.

"If it's a locally owned bank, the business owner can walk right in to the bank and sit down with the president," says Shuster. "If it's a major bank branch, you're going into the bank and talking to a branch manager who is going to have to fax a financial statement to Dallas or Minneapolis or New York or someplace before you can get an approval for a loan."

More important than whether a bank is locally owned, contends Wingert of Community Bankers Association of Illinois, "is how it actually operates and functions within the market." He suggests paying attention to whether the bank is returning the deposits that are gathered from that market to that market--in the form of loans or civic involvement, for example.

When you have signed on with a community bank, treat it as you would a partner. The goal of Lovell's bank, he says, is to serve as a financial counselor to small-business owners, on a par with their accountant and attorney.

Take every opportunity to meet with or call your banker for advice and for help in long-term planning, advises the American Bankers Association's Murphy "It's in the best interest of the community as well as that of the community bank that your business grow and prosper."

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