| First Quarter 2013 | story by ANNE BROCKHOFF | photos by STEVEN HERTZOG |
When it comes to banks, Lawrence is spoiled for choice. Some 20 banks operate here, offering every service a customer might want. All of them are clearly part of the community, especially when it comes to supporting local nonprofits, organizations and events. But are they true “community” banks of the sort It’s a Wonderful Life’s George Bailey might have recognized? Answering that question is harder than you might think.
Size is the easiest way to define a community bank, and many industry analysts say any bank with less than $1 billion in total assets qualifies. Size doesn’t tell the whole story, though.
How a bank does business is just as important, and not only when it comes to classic films. According to a community banking study released by the Federal Deposit Insurance Corporation in December 2012, true community banks are locally controlled, emphasize traditional banking activities in a limited market area and prioritize long-term customer relationships.
In other words, they keep decisions and dollars at home – something the FDIC study says is undeniably good for local economies.
“Community banks foster economic growth and help to ensure that the financial resources of the local community are put to work on its behalf,” the study says.
Among Lawrence’s banks, four are based here: Douglas County Bank, Lawrence Bank, Peoples Bank and The University National Bank.
Their corporate address is part of what helps keep these banks’ focus on the community, says Ted Haggart, president and chief executive of Douglas County Bank, which has total assets of $285 million.
“This is where our interests lie,” Haggart says. “Our employees and their families live here, their kids go to the schools and they take part in so much community service.”
In the case of Douglas County Bank, that adds up to 82 employees, a dozen board members and its owner—the Beach family of Lawrence. The bank does about 90 percent of its business within the county, with six Lawrence locations and one in Eudora.
Lawrence Bank is also headquartered in Lawrence, and its six directors and its holding company’s shareholders all have ties to the city, bank president Les Dreiling says. It operates two locations with 18 employees and has total assets of $69.7 million.
Peoples Bank has nine Kansas branches and seven in New Mexico, but the ownership and corporate office is in Lawrence. The Winter family controls 95 percent of the bank, which has total assets of $441 million, according to fourth-generation Lawrence resident, board chairman and chief executive Wint Winter Jr.
The University National Bank, which has one location and total assets of $69.5 million, is also locally owned, according to its web site (UNB president Todd Sutherland did not respond to requests for an interview).
Together, these banks contribute directly to the Lawrence economy by keeping jobs, executive opportunities, shareholder profits and bank earnings in the community.
“We’re our own little engine in that way,” says Tim Metz, vice president of loan services for Douglas County Bank.
Perhaps even more important, though, is how local control impacts decision-making. Take the loan process at Douglas County Bank. When an applicant approaches the bank, she first meets with a local advisor to discuss the loan’s details.
The typical loan is then considered by an in-house loan department; larger loans are reviewed on-site by a loan committee. The largest loan requests are evaluated by another loan committee comprised of board directors.
Because all the decision-makers in Lawrence, the bank often has more flexibility when considering what Haggart calls unique loan opportunities.
“Sometimes when something doesn’t fit the mold or general guidelines, we’re able to say yes,” Haggart says. “There may be a special reason to make the loan, and knowing the character and financial background of our customers helps us do that.”
If an applicant doesn’t qualify, the bank works with them to get to that “yes.” Loan officers help them refine their business plans, seek alternative financing like Small Business Administration loans or match them with advisors like those at Lawrence’s Small Business Development Center.
“Most often, loans are not so much denied but we ask ‘have you thought about doing it this way?” Haggart says. “We counsel (applicants) and help them find alternatives or levels of loans that work for them.”
When that happens, small business customers often return when they need a home loan or other services.
“There’s a kind of loyalty that develops there,” Haggart says. “That’s really important in community banking.”
All bankers work hard to understand their local economies and customers. The difference between community banks and their larger competitors is that they tend to give that specialized knowledge greater weight when making lending decisions, the study says.
Known as relationship banking, it’s a hallmark of community banks, Dreiling says.
“We probably know the local economy better because we’re involved in the local economy,” he says. “It helps being a local bank, having local board members and having local people who understand the community you’re involved with.”
That approach clearly benefits entrepreneurs. In 2011, community banks held only 14 percent of total U.S. banking assets, yet they generated 46 percent of all small loans to farms and businesses, the FDIC study says.
Building relationships yields another benefit for community banks: fewer bad loans.
Community banks consistently reported lower average loss rates in residential real estate loans and loans to individuals from 1991 through 2011, according to the FDIC study. That was partly due to their emphasis on relationship banking, especially during economic downturns.
That’s not to say the current recession skipped Lawrence banks. Peoples Bank, which last year closed mortgages in all 50 states, suffered what Winter calls a “massive credit loss” in 2009.
“When the bottom dropped out of the real estate market, we took a good, big hit,” he says. The bank is now experiencing a turnaround, and in 2012 further reduced its bad asset levels, increased its capital and generated net income of nearly $5.5 million.
Even banks that didn’t suffer credit losses found conditions challenging. While community banks saw a jump in deposits as customers sought so-called “safe havens,” historically low interest rates prevented that growth from translating into profit.
That’s because low rates reduce net interest income, or the difference between the interest rate a bank charges on loans and how much it pays on deposits. Community banks especially felt the squeeze, because net interest income typically accounts for about 80 percent of their revenue, compared to two-thirds of revenue at non-community banks, the FDIC study says.
And while a bump in deposits meant community banks had more funds available to lend, the slow economy slashed loan demand. There were simply fewer people buying or building homes, and fewer businesses opening or expanding.
“If you don’t have new business and industry opening up, you don’t have the opportunities to make loans,” Dreiling says.
The University of Kansas proved a stabilizing force on both jobs and real estate, but growth in Lawrence has stagnated in recent years. That may be changing, however.
Haggart, Winter and other local bankers are cautiously optimistic about an uptick in home sales and both residential and commercial construction. More entrepreneurs are seeking loans for new businesses, Dreiling says.
“We’ve handled probably half a dozen small business loans in the last six months on start-ups, primarily in Downtown,” he says.
Even after Lawrence’s economy rebounds, community banks will still face other pressures, especially on the regulatory front.
“The amount of regulatory burden coming out of D.C. and toward our community banks is absolutely staggering,” says Shawn Mitchell, president and chief executive of the Community Bankers Association of Kansas.
The passage in 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, along with the controversial formation of the Consumer Financial Protection Bureau, means new regulations for banks. Basel III, which is meant to globally standardize bank capital and other requirements, is also expected to impact current rules.
Proponents say the changes are necessary to protect consumers. Critics counter that reforms address businesses and practices that aren’t relevant for community banks, ignore their unique structure and saddle them with an undue regulatory burden.
Either way, change is inevitable, and figuring out how to manage the new regulations and putting the information technology systems in place to do it will cost banks time and money.
“IT and compliance are some of the fastest-growing costs we have,” Dreiling says.
Like many community banks, The Lawrence Bank is too small to warrant its own IT department. Instead, a designated employee handles some issues in-house and the bank contracts with Sanders Software Consulting in Lawrence to oversee others.
It also shares compliance personnel with Great American Bank of De Soto; the two banks are both owned by holding company First Financial Bancshares.
So, what about the rest of the town’s banks? There are others that count as community banks, even though Lawrence isn’t their home community.
“It goes to the mentality of the bank, not the location,” the CBAK’s Mitchell says. “Even if they’re branched in other towns, they can be just as loyal to those towns as they are to their own.”
Central National Bank of Junction City is that kind of bank, says Jay Smith, the bank’s Lawrence market president. The family-owned bank dates back to 1884; it now operates in 22 communities and has total assets of $858 million.
“We’re an in-state owned bank that really understands Kansas,” Smith says. “We’re in places like Tipton, White City, Glen Elder and Hillsboro. Those aren’t the profit centers larger banks go after.”
Community banks are often the only banks in small, rural towns, the FDIC says, and they hold a majority of banking deposits in rural counties and micropolitan areas with an urban core population of between 10,000 and 50,000.
Lawrence has plenty of other out-of-towners, too, including the $228 million First State Bank & Trust of Tonganoxie and Capital City Bank of Topeka, which has total assets of $410 million. There’s the publicly traded Landmark Bank, small specialists with mortgage production offices in Lawrence, regional bank outposts and branches of some of the country’s largest financial institutions.
They all bring something unique to the table, and Lawrence’s locally owned community banks welcome the competition.
“A good, healthy banking environment with competition helps everybody,” Lawrence Banks’ Dreiling says. “It keeps banks competitive and allows the customers to have the opportunity to get the best deal.”