A community investment

How banking small has saved the north country.

A black cloud formed over the banking industry in 2008. Subprime mortgage holders defaulted. Banks collapsed. Money vanished and homes foreclosed. Big banks paid millions in bonuses while individual consumers lost their shirts. The storm clouds were visible in the north country as large, multi-national banks pulled out of small communities, retreating to large urban centers. But depositors were protected from the financial storm, thanks to the cover of A local financial system that guarded consumers from the worst.

The departure of big banks after the recession’s start wasn’t a huge surprise to many industry insiders.
“HSBC’s move [in 2012] from our market was just one in a long line of departures of regional or national banks,” Watertown Savings Bank president and CEO Mark R.Lavarnway said. “Before that [it was] Fleet and Chase. They’ve all left the market as well.”

But HSBC’s loss, Mr. Lavarnway said, was his gain.
“We picked up 1,700 new accounts from the flux in the market.”

From June 30, 2008, to June 30, 2013, Watertown Savings Bank grew deposits by $108.3 million, increasing its market share in Jefferson, Lewis and St. Lawrence counties from 12.23 percent to 15.94 percent.
While overall deposits at north country banks grew by only 1.7 percent between 2008 and 2013, DeWitt-based Community Bank, a regional lender that holds nearly $1 billion in deposits in the tri-county area, racked up an impressive 62.43 percent deposit growth.
“Some [of that] came from building branches, but we also purchased branches from some of the bigger banks that thought it wasn’t worth staying,” chief financial officer Scott Kingsley said.

Movements of large banks may capture headlines but, much like the nation’s financial crisis, big banks often cast a pall over the story of community banks, defined by the New York State Department of Financial Services as those with total assets of less than $10 billion. Rolled into these numbers are credit unions, a smaller segment of the community financial sector but one that has gained momentum. In the past five years, credit union membership in the north country grew by 8,477 and deposits held there grew by 60 percent, a significant gain by any measure.

NUMBER CRUNCHING

Through thick and thin, community banks have provided a steady engine for economic growth over the long haul. The numbers tell an impressive story of a local banking boom: Community banks decreased in number between 1992 and 2011, from 299 to 169 statewide, but local banks that remained have grown their total assets during the same period, mostly driven by increased real estate and commercial lending. Between 1992 and 2011, the sector went from $1.3 billion to $4.4 billion, according to the state Department of Financial Services.

Part of the resilience is the ability that local banks have to grow in a measured way.
“We grow from 3 to 8 percent a year. If we chose to grow 10 to 20 percent a year it would change our risk profile completely,” said Tom Piche, president of the 126-year-old Carthage Savings and Loan, which held $145.26 million in deposits last year for a 5.25 percent market share.

So instead, small banks choose to keep the growth stable.
“We’ve managed our balance sheet over a century; that’s allowed us to grow and be relevant,” Mr. Piche said.

Credit unions, too, seem to have provided an alternative for big-bank customers, gun shy after the financial crisis.
“A lot of people in 2008 were questioning banks and big banks. One large focus of credit unions is that we’re owned by shareholders and we’re run by our members, so our profits go right back in. That’s very attractive,” said Denise Lariviere, vice president of member solutions for the Watertown-based Northern Credit Union.

Credit union growth across the state was modest, but trending upwards between 2007 and 2013. And while the state saw a decrease in the number of credit unions, assets increased year over year for the same period. In 2008, credit unions headquartered in the tri-county region held about $457 million in deposits (or shares). By 2013, that had grown to $732 million.
That black cloud that hangs over the industry, it seems, dissipates while traveling north in New York state.

Back 2008, HSBC Bank USA, was the clear market leader in Jefferson, Lewis and St. Lawrence counties. Around the same time it pulled out of the north country, another other large national bank, Cleveland, Ohio,-based KeyBank, cut its staff. In 2008 KeyBank held about a 17 percent market share in the tri-county region. In 2013, it was the same, flatlining at 17.

Interestingly, by 2013, HSBCs 23 percent market share had been divvied up among local and regional banks, with Community Bank taking the top spot in the market. The major local players stayed mostly in the same marching order, but filled the void left by HSBC. In 2008, Community Bank had a little less than 21 percent market share. By 2013, it grew to slightly more than 33 percent.
In Jefferson County, HSBCs departure cleared the way for Watertown Savings Bank, which grew to a near 16 percent market share from about 12 percent in 2008.

Skin in the game

The numbers show that when one big bank pulls out, it’s the local or regional banks that fill the void, not other large banks. But can local banks provide the same services? Can they stimulate local growth like an HSBC or KeyBank?

Community and regional banks have always been integral to local commerce. Though smaller banks only hold about 34 percent of total assets statewide, these homegrown banks make a staggering 90 percent of small business loans, according to Benjamin Lawsky, superintendent of the state’s Department of Financial Services. Small business loans are defined as loans of $1 million or less.
That turns out to be good for small business, too, since local banks tend to make better local choices.
“We have more knowledge in the community than a bank that makes decisions elsewhere,” Mr. Lavarnway, of Watertown Savings, said. “We have a very clear view of who and what this community is and how it operates.”
That means some flexibility with loan terms so small businesses are not shut out of the economy by restrictive rules that large banks often put in place to reduce risk.
“Big banks might say: ‘Nationwide we’ve had 15 restaurants fail in the first quarter. No more restaurant loans. That’s the edict from high above,” Mr. Lavarnway explained. “But we may get a [loan application for a] restaurant in Clayton. We know there’s a new hotel going in, the antique boat museum is popping and we aren’t bound by rigid corporate decisions. We can be intuitive about our market and get more into the gray area, versus a black-and-white decision from somewhere else.”

At its core, the local banking industry has maintained its role as intrinsic to the community. After all, the purpose of banking is to circulate money in a community, passing surplus around so that those with extra can grow their wealth, allocating money to burgeoning businesses and young families borrowing for homes. Many sometimes forget that using a bank means a contribution to common goals as a community.
“When you bank with a local bank, it a sustainability thing,” Mr. Piche, of Carthage Savings, said.
Most local banks are active in community. This bird’s-eye view helps the community while giving banks a bird’s-eye view of economic development.
“We do a lot for the community and sit on a lot of boards so we know what the needs are,” Mr. Piche said. “We are intimately involved in what’s going on in the north country and that’s a beautiful thing.”
The history of these banks reflects the history of local communities. The oldest bank in Jefferson and Lewis counties, Carthage Savings and Loan, was founded in 1888, and is still cooperatively owned as it was when it was chartered.
The history of banking in the north country is a reminder of that legacy.

Northern Credit Union started in the cafeteria of New York Air Brake in Watertown in 1955. Watertown Savings Bank’s name and corporate structure has been the same for 120 years — a board of directors and no shareholders.
“The day-to-day management team and trustees are all local people who live in this community,” Mr. Lavarnway said.
And Community Bank, chartered as St. Lawrence National Bank in 1866 in Canton, has purposefully chosen to focus on a “non-metropolitan strategy,” Mr. Kingsley said. So when it has expanded, the company has chosen to do things like add 250 operations personnel in Canton, versus going to a larger market like Syracuse.

RURAL ACCESS

Those who live in town might not realize how hard it is for some people to just get to a bank. Take for instance, farmers. In 2010, the state produced $4.7 billion in agricultural sales, according to the Department of Financial Services, yet most farms are located in communities that have virtually no access to banks. Community banks make nearly all the farm loans in the state. Even when HSBC was a market leader in the area, it didn’t fund agricultural businesses.

It’s the smaller bank that helps boost rural communities by providing access and services that larger banks would generally not find profitable.
“In these rural marketplaces, there are a lot of self-employed people,” Mr. Kingsley said. “Self-employment isn’t as easy to verify as someone who has a W2.”
Rural mortgage lending also faces particular obstacles that have historically prevented big banks from investing in local communities. Many lenders sell their mortgages to Fannie Mae and Freddie Mac but continue to service the loans. But, for example, Fannie and Freddie consider anything larger than 10 acres a “farm,” and won’t buy or originate loans for farms. Local banks will, choosing to keep those mortgages in their portfolio rather than sell them to Freddie and Fannie. This is also why regulators call smaller banks like this “portfolio lenders.”
Access can take on a very personal meaning at community institutions: “You can talk to me, you can talk to the board guys, I can give you the direct line to my desk,” Mr. Lavarnway said. “You can’t get the president of KeyBank on the phone.”

At Community Bank, they “give branch managers lending authority based on local knowledge. We have that flexibility of having that local model, but we have the [leverage] of our size,” Mr. Kingsley said, noting that the bank has branches in most non-metropolitan areas and also in parts of Pennsylvania.
This medium size means the bank is small enough to give personal attention, but the fluctuations of the market can be spread around.
“I’ll put it this way: It’s like if St. Lawrence County catches a cold, North Country Savings Bank [with $190 million in deposits versus Community’s $917 million in the tri-county area] gets pneumonia, sheerly because of concentration. We’d just get the sniffles,” Mr. Kingsley said. “Some years might grow fast in Watertown, the next year we grow more in Potsdam.”
Credit unions have traditionally focused on consumer deposits and lending, adding business services as assets increase. You can see the health of Northern Credit Union as it expands its business solutions group to offer more services to small businesses and the self-employed.

FROM TELLERS TO TECHNOLOGY

Remember paydays of yesteryear when lines stretched out the door of banks packed with people waiting to deposit their checks and get cash for the weekend? Those days are officially over, thanks to technological services and convenient bank infrastructure like ATMs.
“The biggest trend right now is the onset of innovation,” Northern’s Ms. Lariviere said. “[Things like] Internet banking, remote deposit capture, online bill pay. More people migrate into those channels versus in person. It costs money to offer innovation, but we like the fact that our members are taking advantage of alternative channels.”
Northern has adopted a concierge-style in its branches, where a greeter can direct customers to all sorts of services.
“Decreased volume means more time to talk to people and make sure that outside the base transaction we’re discussing their greater needs, whether it’s saving money or planning for the future,” Ms. Lariviere said.

Lower walk-in traffic can be seen as an opportunity for banks to reestablish themselves as local and relationship-oriented while boosting customer loyalty.
“We purchased some branches from Bank of America in Pennsylvania,” Community’s Mr. Kingsley said. “What we found was they were charging their customer for doing transactions with a teller. They were being charged 75 cents, versus doing banking online. They had trained their customers to avoid fees and so they were avoiding personal contact.”
So local banks are now challenged to engage their customers when they do come in a branch office.
“What we’d like you to do is use the full suite of our products. Once we get you to do it, you’ll be more content with your outcome. And it’s also much harder to change your bank once you’re engaged in the whole product tree,” Mr. Kingsley said.

Technology has changed the way the consumer banks, without a doubt. But in a market like the north country, it provides marked benefits. Rural communities are eager adopters of new bank technology. About 20 percent of all consumers used mobile banking between 2011 and 2012 and 29 percent of those in “under banked” communities used these technology, according to a 2012 Federal Reserve survey.
And that’s driving innovation particular to a small-town banking system. For instance, Northern Credit Union is deploying Interactive Teller Machines in its new LeRay branch, where customers talk to a real person on a screen, much like Skype or a similar live video chat service.
“That teller is housed in a call-center environment centrally and can provide the exact same services as if they were there at your branch,” Ms. Lariviere said.
This way, branches can stay open in far-flung locations without the overhead of having a full staff on-hand. Eventually, their ATMs will have an option to talk to a teller on the screen, too.

Technology may replace customer service jobs, but that isn’t altogether bad news. In smaller banks, like at Watertown Savings, the switch can mean employees can gain new skills.
“Many of our tellers have just moved up to the IT department,” Mr. Lavarnway said.
But replacing tellers with technology departments doesn’t come cheap.
“It’s expensive from the physical infrastructure to the training to the regulations. What we’ve found is the customers really like it and they’re clamoring for it. We’ve been able to roll out a top-notch product on par with or that exceeds what big banks do,” Mr. Larvarnway said.
Convenience-based banking technology isn’t going away.
“That’s the cost of playing today. If you don’t have those options, there’s a part of your customer base that won’t be there in five years,” Mr. Kingsley said.
The silver lining is that rapid deployment of technology means small banks can get the systems that big banks develop in short order, making them more competitive, more quickly.

VIRTUAL TRANSACTION SECURITY

As technology becomes more ubiquitous in smaller areas, concerns for banking and financial security grow.
“Protecting our information is in the top two things that the regulatory bodies behind the banking industry are worried about today,” Mr. Kingsley said.
That’s because the banks bear the burden of security breaches where criminals steal and use bank information for purchases.
“As long as you can demonstrate that wasn’t you [making a fraudulent charge], we have to eat that exposure,” he said. So chances are whatever bank a consumer uses is more than rigorous in monitoring accounts for unusual activity.

When customers at the Minneapolis-based national chain retailer Target were victimized through stolen bank card numbers, Watertown Savings Bank took a proactive step that not many larger banks would even consider.
“I called my IT guy and had him search all customers that had debits at Target between the dates [when the data breach occurred]. Then I ordered them all new cards,” Mr. Lavarnway said. “No other banks did that. None of our customers need the risk.”
It’s not a stretch to say that banking is one of the most cyber-secure industries we use as consumers. But that doesn’t mean money is safe.
“The disconnect now [is] that retailers want the same outcome, but aren’t expending the same type of resources [to address theft],” Mr. Kingsley said.

POST-RECESSION REGULATION

Once the recession began in earnest, federal regulators scrambled to pass new rules aimed at preventing future financial crises. Smaller banks didn’t engage in the kinds of negligent business practices that caused the financial system meltdown. Ironically, they are among the most negatively impacted by the new standards. Bank compliance costs are proportionally higher for small banks. Under proposed Basel III rules, the Department of Financial Services estimates that small institutions could rack up costs to comply as high as 10 percent of their operating expenses, putting them at a competitive disadvantage.
“When we were making a mortgage in Potsdam, our product required a 20 percent down payment. In the subprime world, you didn’t have to prove much. There were fast-track approvals, putting 2 percent down,” Mr. Kingsley said.
There are those at the state level fighting for the small banks.
“We want to make sure we lift the heavy weight of regulation off portfolio lenders,” said Michael Smith, president and CEO of the New York Bankers Association. To that end, the association, along with the Department of Financial Services, supports exempting community banks with smaller asset bases from some of the more burdensome regulations.

THE FUTURE OF LOCAL BANKING

It can be tough for a new financial institution to grow deposits and build a strong, diverse loan portfolio. Yet, between 2005 and 2009 – some of the worst years of the recent financial crisis – the Department of Financial Services issued 13 new community bank charters and only three failed.
In the coming years, expect an expansion of fee-based services for revenue. Because interest rates are so low, banks aren’t making much money on interest.
“Most banks are focusing on fee-based services. You’re getting some advice relative to planning. A person helps you process a transaction, there’s a transactional fee and then maintenance fee,” Community’s Mr. Kingsley said.
“Over the past 20 years in banking you’ve been coached into thinking that should all be free — the bank is providing intermediation services for the privilege of them having you as a customer.”
He said banks like his are not rushing to start charging money because it sometimes runs counter to the rural banking model, and local banks can’t afford to alienate their consumer base.

New technology will also continue to bolster access to bank customers and make transferring money more and easier. It will not seem like science fiction to send money from a personal checking account and a little league coach’s account to pay for team fees with a smartphone.

Whether talking about big banks or little banks, regionals or credit unions, the good news is that the soft market seems to be gaining strength. And as local dollars return to banks, the north country is getting back to the core purpose of community banking: Growing the local economy, in ways that makes sense locally.

By Victoria Wiseman, NNY Business.