In this week’s video I explain the importance of community banks and small businesses.
Archive for the 'Banking - Investors - Capital' Category
Wall Street’s too-big-to-fail banks were the parents of the 2008 financial crisis. But one-size-fits-all reform reaction to the crisis by Congress and regulators is turning Main Street banks into collateral damage, as if they were too-small-to-matter. Here’s why anything that unnecessarily burdens community banks should concern every small business owner.
At the end of 2012, there were 7,092 banks insured by FDIC, of which 6,201, or 87%, were community banks with less than $1 billion in assets. Banks are classified by asset size, and the average community bank has just over $200 million in assets. By comparison, two big banks – Citigroup and Wells Fargo – are each the size of all 6,201 community banks combined.
Small business owners don’t care much about a bank’s asset size. But they care very much about certain bank characteristics that manifest uniquely in a community bank as its special sauce – relationship banking. To a small business owner a community bank…
… is locally owned and managed.
… takes into account a business owner’s character when making loan decisions.
… decides small business loans by a local committee, not credit scoring by a computer.
This definition is important because, by definition, all small businesses are undercapitalized. How this translates out on Main Street is that sooner or later, and more often than not, small business owners will need to avail themselves of a community bank’s special sauce.
According to the Independent Community Bankers of America (ICBA), even though community banks have only 20% of all bank assets, and hold less than 20% of total deposits (FDIC), they make almost 60% of small business loans. This tracks closely with our own research. In a recent online poll we asked small business owners about their banking relationship and 53% told us their primary bank, including for loans, was a community bank.
A recent FDIC study confirmed that community banks serve all Main Streets: Of the more than 3,000 counties in the U.S., about 20% are represented only by community banks.
Bank loans are the largest source of growth capital for America’s small businesses, which just happen to create over half of the U.S. economy and employ over half of its workers. Consequently, regulating Main Street banks the same as Wall Street’s too-big-to-fail banks puts in jeopardy America’s small businesses and the economy.
Small businesses and community banks are the twin pillars of America’s Main Street economy.
40% - One of the large national banks (like Bank of America, Wells Fargo, etc.)
52% - A community bank (locally owned with just a few branches)
7% - A credit union
For all small businesses, retained earnings - profits left in the business - are the most important source of working capital. But for most small businesses, the largest source of capital comes from bank loans. That’s the reason I’ve continued to remind you every year that the most important relationship a small business has - besides with customers - is with your bank.
There is some very interesting research that has been published recently about the banking industry. In next week’s Feature Article, I’m going to connect some of that research with the poll responses you see above. Stay tuned.
You can find this week’s featured article HERE
America is exceptional for many reasons, not the least of which is the way our pioneer DNA morphed into entrepreneurship. But all DNA has to be nourished, and the food of entrepreneurship is capital.
As America’s pioneers claimed Manifest Destiny they simultaneously created businesses and markets, which were funded at first by sweat, blood and personal capital of the pioneer/entrepreneurs themselves. As businesses and markets grew, additional capital was needed, which was provided by another American invention: locally owned banks. Today we call them independent community banks (ICB).
There are a number of reasons America became the world economic leader. But no factor was more important than the financial, legal, regulatory and trust environment that fostered relationships between ICBs and small businesses. These two Main Street sectors formed a symbiosis that simply does not exist anywhere else on planet Earth. Indeed, without this symbiotic relationship, the twin pillars of the American Dream – home and business ownership – would not have been possible, nor would the financial foundation of American exceptionalism.
Alas, this unique relationship may be in peril. But not because of anything the two primary partners have done.
The financial crisis of 2008 shined a bright light on the behavior of large financial institutions, which had become too complex to regulate, too big to manage and, according to the government, too big to fail. But as the federal government and regulators attacked this crisis, ICBs are becoming collateral damage as the new regulatory regime does not differentiate enough between big banks and small ones.
It’s troubling enough to learn that existing ICBs are finding it difficult to manage under the new regulatory pressures, but that’s not the worst of it. Prior to 2008, when an ICB closed or was acquired by a larger bank, the marketplace would produce a new ICB to fill the newly vacated relationship-banking niche. But the following stats foretell an alarming trend.
According to the Independent Community Bankers of America (ICBA), there are 1,119 fewer ICBs today than in 2007. Only 96 new ICBs were chartered from 2008 to 2010, and since 2011, there have been no new ICB charters. Not one in 18 months! And if industry experts are correct, the net number of ICBs will continue to drop, ultimately to a dangerous level.
There are many causes of this alarming trend, but presently the biggest offender are the one-size-fits-all “solutions” being imposed by overreacting politicians, overreaching regulations and overzealous regulators.
In nature, when one member of a symbiotic relationship is diminished, the other is usually harmed too. Fewer independent community banks will result in a weakened small business sector. I call this trend The Small Bank–Small Business Cascade, and it must be stopped.
Small businesses are not only the backbone of the U.S. economy, they’re also the seedlings of future big businesses and the personification of the American Dream.
America, beware The Small Bank–Small Business Cascade.
I’ve talked with Mike Menzies, President of Easton Bank & Trust in Easton, Maryland about the dwindling number of independent community banks in the U.S. and the impact on small businesses. Click on one of the links below to download or listen.
With which of these three do you have your primary business banking relationship?
36% - Independent community bank
4% - Credit union
In our most recent online poll, over 60% of respondents to our most recent poll chose “National or large regional bank” as the financial organization they have their primary relationship with. A little more than a third chose, “Independent community bank,” and only 5% said “Credit union.”
As you may know, for most of two decades, I’ve advised small business owners that not only should one of their banking relationships be with an independent community bank, it should be their primary bank - the one that has your deposit account and is your go-to bank for a business loan.
Blasingame’s 2nd Law of Small Business states: It’s redundant to say “undercapitalized small business.” This truth is why small businesses need a bank relationship that’s heavy on the relationship part; with a bank that has one of its founding principles to serve small businesses in the community, including making local loan decisions by humans, not computers.
I never said there was anything wrong with the big banks. In fact, I have recommended that small businesses should have a second relationship with a larger bank. One good reason is because if your business grows to a point where you have multi-millions in annual revenue, you could outgrow your beloved community bank and that’s when only a large regional or national bank will do.
But my advice to maintain a relationship with a locally-owned and governed community bank turned to prophecy when, in 2008, the national chain banks and the large regionals got caught up in the financial crisis and they basically abandoned small businesses. They didn’t do this to be mean; they did it to survive.
Big banks are trying really hard to recover the ground they’ve lost in the past three years, so perhaps their plan is working. Also, loan demand by small businesses is still very low, so the computer-generated, credit-scoring method of loan evaluation practiced by the big banks is not yet putting pressure on these relationships.
Nevertheless, I still believe that, regardless of any other banking relationship, a small business should have an active relationship with an independent community bank - if for no other reason than long-term survival.
Recently on The Small Business Advocate Show I talked with my friend and Brain Trust member, Mike Menzies, President of Easton Bank & Trust in Easton, Maryland about the independent community bank landscape and how independent banks are faring in this economy. Click on one of the links below to listen or download.
Mitt Romney’s record in the private equity industry has become part of the election year political debate. The Romney campaign offers it as a positive credential and the Obama campaign has disparaged the industry as a way of casting a negative on Romney’s record.
Recently, a former leader in the private equity sector and President Obama’s former “car czar” and loyal supporter, Steven Rattner, weighed in with support for private equity by allowing that these firms are completely legitimate and add value to our economic system. But, as if to throw a bone to his former boss, Rattner also pointed out that private equity firms are founded to create wealth, not jobs. Here is one of Rattner’s quotes on this issue:
“Bain Capital — like other private equity firms — was founded and managed for profit … earned legally and legitimately. Any job creation was a welcome but a secondary byproduct.”
With this pronouncement, Mr. Rattner finds himself in historic company.
In his seminal work, “The Wealth of Nations” (1776), Adam Smith, introduced his now immortal “invisible hand” theory, which proposes that an individual, “led by an invisible hand” in pursuit of “his own interest, frequently promotes that of society more than when he really intends to promote it.”
For Smith, who is considered the father of economics, there was no chicken/egg quandary. The chicken – individual self-interest – comes first, followed by the egg – benefit to society. Mr. Rattner, perhaps without intending it, is singing Smith’s song in 21st century English: profit first, jobs second.
Nor is there a chicken/egg quandary today. In our capitalist, free-market economic system, the chicken is profit and the egg is jobs. It’s superfluous to say that jobs are the secondary byproduct of private equity; jobs are the byproduct of capitalism – period. In fact, the only economic system that has job creation as a founding imperative is communism.
From the very first small business created in America to the millions that have been formed since, from the sole proprietor to the 499-employee high-growth enterprise, all were founded with the nuclear notion of generating profits that will ultimately create wealth. And as essential as employees are to accomplishing a business founder’s wealth-creation goal, no pre-start-up entrepreneurial dreamer ever thought, “I want to commit all of my time, energy and resources – and risk everything – so I can create jobs.”
Like any venture that takes risks, private equity firms have to make tough business decisions and they make mistakes, which are fair game for critics. But if you’re going to malign private equity firms because their founding principle is to create profit and wealth, then you would have to extend that indictment to all 26 million American small businesses.
Led by an invisible hand in pursuit of their own wealth-creation self-interests, America’s small businesses benefit society by producing over half of U.S. GDP, creating most of America’s new jobs and delivering tens-of-millions of paychecks to their productive and grateful employees every month.
For small business, the chicken is profit and the egg is jobs.