Daddy's Bank

It’s Not Your Daddy’s Bank Anymore (Or Yours Either, For That Matter)

After an entire summer blissfully not blogging, what better way to ease back into the humdrum routine of enraging and/or boring my jaded readership than by letting my friend, former community banker Pat Dalrymple, do the heavy lifting for me with a guest post.

Pogo Possum, in Walt Kelly’s classic comic strip, once intoned, “We have met the enemy, and he is us”.

In 1973, I was lucky to be hired to run a de novo thrift in Aspen Co. Our chairman was a young guy, a graduate of the Wharton School of Business at Penn, who was fortunate enough to retire at 40 and fill his time with interesting projects.

While I was getting the doors of the business open, he attended the Colorado state S&L convention. Upon his return, my friend Mike paraphrased Pogo: “I’ve met the enemy, and it’s us”.

Not much has changed in 42 years, especially at the community banking level.

But, some leaves are rustling. We’ll see if it develops into a wind of change.

It’s noteworthy that, almost to a man (and there are precious few women in the job) all of the CEOs of small banks were comfortably ensconced in the position before the Great Recession. Now, they’re riding off into the sunset, or going to that Great Loan Committee in the Sky. Maybe traditional banks think will go with them.

Here are a couple of revealing conversations I’ve had in the past month or so:

A banker that I respect who’s at the top of the depth chart for his position recounted an anecdote from the security line at Denver International Airport. Going through this procedure is an experience that he detests, so he was miffed to see a young man ahead of him in line chatting up and laughing with the TSA agent. “Who has a friendly tete a tete with a TSA apparatchik?”

Then, he realized that the kid grew up with 21st-century airport security. He’d never experienced wandering an airport at will, and greeting friends at the gate, so it never occurred to him to get all worked up over a normal situation. So it will be, my friend realized, with banking. The excessive angst of bankers over regulatory risk and oversight will fade with the older generation.

The second conversation involved a leading banking consultant who asked one of his small-town bank clients if he was leaving the business, like many of his peers, in disgust as a result of Dodd-Frank and the CFPB.

“Why would I do that?”, was the response. “I’m hiring smart young people who never knew how it was. They’re taking the heat for me, and they think it’s just another day at the office.”

Whether us old fogies are riding into the west, or, more appropriately, sinking like mammoths into the swamp, there’s a new generation that will hopefully not be bound by the inherited thinking of several generations of bankers.

Maybe they’ll understand what community bankers have missed since Bonnie and Clyde were making premature withdrawals: The business of banking isn’t lending money; rather, it’s the function of making a profit on the movement of money.

Nothing illustrates this disconnect better than recent meetings I had with an account exec for a national factoring firm. His firm has been frustrated for years by the failure of the banking system to capitalize on his company’s ability to serve banking customers that either doesn’t meet the banks’ lending criteria or the financing format isn’t offered by the bank. He said he’s suggested setting up a consortium of banks to funnel un-fundable business to his firm and has urged individual banks to use the resource, all to no avail.

Non-institutional lenders like this aren’t asking for freebies. They pay very well for referrals, and they do all of the work. It’s about the easiest way to make money on money movement imaginable.

At the end of the meeting, he casually dropped a comment that encapsulates the whole sad state of banking’s perception of itself. His company got a bank referral, and duly paid for it. But, he said, “We had to pay the fee to the banker’s wife because it was against regulations for him to accept it.”

What?

Sure, this was motivated to some degree by greed on the gentleman’s part, but probably the situation was due more to a cultural mindset than to avarice. It simply didn’t occur to the banker that he had a profit center at his fingertips, nor, most likely, would it ever.

Every bank should have a Non-Conforming Lending Division to move money from other sources at a profit. When a customer doesn’t qualify, that potential source of revenue should be ushered across the hall to the bright young lady that runs the NLD, to tap one of a stable of non-institutional lenders.

And every community bank should have a robust mortgage brokerage operation (yup, I used the “B” word, right here in front of bankers). Today, the playing field is absolutely level; mortgage wholesalers have exactly the same rates and programs like the big players, such as Wells and Chase, and when the loans are funded by the lender, rather than the broker, there’s little regulatory risk, and, of course, no asset risk.

If a bank CEO would take the trouble to total up the money left on the table for, say, the prior 12 month period, it would be hard to explain to the stockholders why so much revenue was spurned. And, I assure you, it’s inevitably a big number.

We continue to hear about the mass extinction of community banks. Maybe it’s true.

After all, if you stand long enough in the swamp, you’ll sink into fossilization, no matter how big your tusks are.

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