As a business owner, you may think that a national or large regional bank can best serve your business. But as a smaller business, it’s easy to get lost in the shuffle.
Community banks may be a better option — they are locally owned and operated, serving their hometown communities. The money deposited in a community bank is reinvested in ways that drive local economies, such as in the form of loans to local residents who want to buy a home or small business owners looking to open a business on Main Street, says Don Mann, former deputy commissioner of banking for the state of Michigan, regulatory liaison with the Community Bankers of Michigan and a bank consultant for a number of community banks.
“By banking locally with a community bank, you can rest assured that your banking needs will be taken care of and that your money will be put to work where it belongs — in your community in the form of loans to local residents and business owners,” says Mann. “It’s a hometown investment.”
Smart Business spoke with Mann about community banks, their importance to the Michigan economy and how they differ from credit unions.
Why are community banks important to Michigan’s economy?
Michigan’s banking industry has experienced a significant change in the past 40 years. Most cities were once lucky enough to have their own locally owned bank doing business on Main Street. In 1970, there were approximately 560 chartered banks in Michigan and more than 75 new banks have chartered since then. Today, the total number of banks is 130.
Where did all the banks go? In 1971, the Michigan legislature changed the law to permit corporations to own bank stock. Previously, only individuals or partnerships were allowed ownership. With that and other changes, bank holding companies were organized in Michigan and allowed to acquire banks, as were bank holding companies located in other states, resulting in a massive bank-buying spree.
Then large banks began buying locally owned banks, and by 2000, the number of banks was 188. Twenty-five banks also failed during this time, although due to FDIC protection, no insured deposits were lost.
The concentration of banking deposits controlled by out-of-state banks is noteworthy. Michigan’s banking deposits, which include consumers, businesses, schools and governmental units, as of June 30, 2011, totaled $158 billion. Out-of-state banks doing business in Michigan control $110 billion, or 70 percent, of all deposits. The top six out-of-state banks hold 57 percent, or $90 billion, of Michigan’s deposit dollars. Decisions regarding how to invest or lend this money are made by individuals and boards of directors located in New York City, Dallas, Pittsburgh, Charlotte, Cincinnati and Columbus.
As we have seen during the recent recession, too many times, the deposits these banks collect from Michigan residents and institutions leave the state to be invested in distant communities far removed from the interests of the local account holders.
What is the makeup of community banks?
The ownership of the bank is generally made up of individuals who work and reside in communities they serve, and this extends to the board of directors, as well. Their local knowledge of the market area provides a significant advantage for the bank and its customers, as they can react more quickly to changing market conditions and customers’ needs.
Unlike the big banks, their business is relationship based, not transaction based. Community banks continue to maintain a tradition of community service, whether financing local business and municipal projects or participating in and sponsoring local events.
What is the difference between a community bank and a credit union?
Community banks and credit unions generally offer the same type of products and services, with the exception of business lending. Credit unions once had membership restrictions, which are rare today, but they still have limits on business lending and are currently lobbying to expand those powers.
Unlike banks, credit unions are not as heavily regulated, are not subject to the Community Reinvestment Act, a federal law designed to encourage banks to help meet the needs of borrowers in all segments of their communities, and do not pay taxes. In fact, a single minimum wage worker pays more federal income tax than the entire credit union industry. Community banks invest in their communities. The taxes they pay support their local, state and federal governments, and they are a key supporter of a community’s infrastructure, making it a better place for all residents to reside.
What are the challenges and opportunities facing community banks today?
Because of the downturn in the economy since 2007, all banks are facing increased regulation and supervision. Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010. This 5,000- page act brought the most significant changes in financial regulation since the Great Depression. The act creates significant implementation issues and will be costly to both community banks and their customers.
Where the federal government was quick to bail out ‘too big to fail’ banks, most community banks were left to fend for themselves. Fortunately, because of their traditional, conservative management practices, most community banks remain among the most financially sound banks in the country.
As many consumers consider switching to a new banking relationship, they need to look no further than around the corner. The local community bank is a safe haven from impersonal bank practices. Community banks only thrive when their customers and communities do the same, so taking care of their customers and looking out for the best interest of their community is ingrained in the way they conduct business. By banking locally, consumers and businesses make a hometown investment they can be proud of.
Don Mann is former deputy commissioner of banking for the state of Michigan, regulatory liaison with the Community Bankers of Michigan and a bank consultant. Reach him at (517) 285-7758 or [email protected]