Study Affirms Community Banks’ Small-Biz Leadership

It’s something ICBA and the community banking industry say all the time: community banks are the nation’s leading small-business lenders. And the numbers back it up. While community banks make up less than 20 percent of the banking system’s assets, they dole out more than half of its small-business loans.

Still, some small businesses continue to test their alternatives: megabanks, credit unions, and now online lenders. The latest set of numbers shows that these businesses should stick with a community bank.

According to a new study from seven Federal Reserve Banks, small businesses that apply for loans with community banks are the most successful and most satisfied.

Here’s what the study found:

• Community banks were the most likely to make a loan, extending financing to 76 percent of loan applicants while large banks approved just 58 percent.
• Community banks also had the highest satisfaction scores, with 75 percent reporting that they were satisfied with their overall experience, compared with scores of 56 percent for credit unions and 51 percent for large banks.
• While online lenders had the second-highest rate of approval at 71 percent, just 15 percent of borrowers said they were satisfied with the experience.
• Of the firms that were dissatisfied with their experience with online lenders, 70 percent cited high interest rates and 51 percent reported unfavorable repayment terms.

With the amount of blood, sweat and tears that goes into launching a startup or expanding a small business, entrepreneurs should know that they have a partner in their local community bank. That is more important now than ever before, as demonstrated in a 2014 ICBA study that found that 41 percent of Millennials say they are very interested in starting up their own business.

So community bankers, let’s continue to spread the word about the importance of our industry in getting small businesses off the ground and taking our economy along with them. It’s an important message that everyone needs to hear, and now we have even more data to back it up.

Loan-Loss Plan Is Direct Hit on Community Bank Lending

The following op-ed originally appeared Nov. 9 on American Banker’s BankThink blog.

It is no wonder that the banking industry strongly opposes the Financial Accounting Standards Board’s proposed reforms to loan-loan loss reserve calculations. The proposal would force community banks, in particular, to completely overhaul their approach to lending. Even some FASB members and more than half of the board’s own Investor Advisory Committee oppose it as well.

The proposal would revamp how banks recognize credit losses on all types of loans. Because community banks follow generally accepted accounting principles — known as GAAP — they normally record a provision for credit losses when they actually have evidence they’ll incur a default. But under the FASB plan, known as the Current Expected Credit Loss model, banks of all sizes would instead take a hit the moment they make a loan. Banks would be required to estimate expected credit losses for the life of a financial instrument and recognize the net present value of those losses at the moment of origination.

This is flawed accounting and antithetical to the community banking model itself. Requiring local institutions to institute and maintain complex and expensive credit modeling systems removes their discretion to make localized financial decisions. Pushing up loan losses in the credit-loss cycle to the point of origination also effectively penalizes community banks for investing in loans, which are made predominantly to individuals and small businesses in their local communities.

This will restrict the flow of credit from banks of all kinds. Tying up more capital in loan-loss allowances will mean lower regulatory capital, fewer loans to consumers and even tighter economic growth. The Office of the Comptroller of the Currency estimates that the proposal will increase loan-loss reserves by an average of 30 to 50 percent, which translates into a decline in bank capital to support local lending.

So, the FASB proposal has problems. What can we do about it? Can we address concerns over recognizing credit losses without damaging the community bank business model? Fortunately, community banks are still in the business of finding solutions. To borrow from John Adams, we want to have a better hand at building up than pulling down, which is why we’ve come up with an alternative proposal.

The ICBA’s alternative plan for institutions with less than $10 billion would base loan-loss provisions on historical losses for similar assets. Expected losses on financial assets that have not incurred losses would be based on the entity’s own historical loss experience for identical or similar assets. If the institution does not have historical data, it could base expected losses on the experience of a representative peer group. If a loan or security became impaired and a loss was probable, institutions would be allowed to increase the reserve based on a specific measurement of impairment.

This plan would build necessary allowances for potential losses and match each loan’s credit risk with its earning potential. It also would recognize reserves sooner in the credit cycle, which meets FASB’s objective of reforming the shortfalls exposed during the recent credit crisis. Most important, the alternative removes the principle of recognizing losses on day one, reflecting the fact that losses generally occur later in the life of the loan. This would limit the negative impact on community bank lending.

Nearly 5,000 community bankers have signed a petition advocating this simpler approach to financial accounting. The FASB should heed the concerns of community bankers, the rest of the banking industry, and its own board and committee members. Fortunately, we can address concerns with our system of loan-loss provisioning without disrupting community bank lenders and those who depend on them for access to capital.

Megabanks Boost Business Portfolio—By Changing the Rules

When your competitors start moving the goalposts, you must be doing something right. A new report from one of the megabanks that contributed to the recent Wall Street financial crisis is defending these institutions and taking on community banks. According to American Banker, the JPMorgan Chase paper says that megabanks lend more relative to their size than do smaller institutions.

How can this be? The Federal Reserve Bank of Dallas recently released the latest in a long series of reports from regulators that have found community banks to be the industry leaders in business lending relative to size. So, what’s changed?

Well, apparently it’s the calculation. JPMorgan has simply changed the rules of the game. In its paper, the megabank expands the definition of credit to include categories of funding that rarely apply to community banks, such as municipal bond originations and residential mortgage securitizations. By simply adding in other sources of funding to the traditional measures of bank lending, JPMorgan has concluded that the megabanks come out on top.

Well, that’s convenient. Of course, every other measure of bank business lending finds that, pound for pound, community banks reign supreme. While they represent a small fraction of the banking industry’s total assets, community banks with less than $10 billion in assets provide nearly 60 percent of small-business loans between $100,000 and $1 million. Community banks remain second to none in making the kinds of loans that drive business and economic growth and stability.

The megabanks can say what they want—this certainly is not the first time they’ve gotten creative with their numbers. But the truth remains that community banks are business-lending leaders. Of course, you don’t need creative formulas and spreadsheets to know that—you could just ask most any small-business owner. I wonder if anyone at JPMorgan knows any by name.

Small Business is Our Business

Community bankers have a positive story, and we love to tell it. So it’s always a pleasure when others help us get the word out about how community banks contribute to our communities and help local small businesses thrive. And that’s been the story this week as community banks and other small businesses across the nation celebrate National Small Business Week.

Slated to run through this Saturday, National Small Business Week recognizes the important role small businesses serve in our economy. Of course, as prolific lenders and small businesses themselves, community banks are a key component of the celebration. As part of the festivities, the Small Business Administration named First American Bank in Artesia, N.M., the 2012 Community/Rural Lender of the Year. The Small 7(a) Lender of the Year award was a tie between Open Bank of Los Angeles and Premier Commercial Bank of Anaheim, Calif.

Needless to say, it’s been a feel-good week for community banks and other small businesses. Community bankers have been using customizable public relations resources from ICBA to spread the word about National Small Business Week. And the good news doesn’t have to stop on Saturday. ICBA launched its “Go Local” initiative to ensure that the message of banking and shopping locally is out there all year long.

Community banks have a good story to tell, and we enjoy telling it. So let’s make sure consumers, small businesses and everyone else hears us loud and clear.