If community banks in Massachusetts really want to compete against the big boys, maybe they ought to fire all the community bankers.
At the Bank of Americas, the JP Morgan Chases, the TD Banks, they think big. Sure, it means that sometimes they lose big. But more often than not, they win big. That’s why the big banks soak up market share like they’re Bounty paper towels, and everybody else is the hapless “leading competitor.”
It could be that size begets size. The bigger the bank, the more assets they have to deploy in order to win business. Chase can fund and advertise scanners and software that lets small businesses deposit checks from their desktops or via their smartphones. BoA can afford to put out more ATMs than anyone else. They’ve got budgets that rival the U.S. Department of Defense. The budgets at local community banks are lucky to be compared to what Monson spends on leaf pickup.
But the big banks weren’t always big. BoA was started by a lone Italian immigrant. They got big because they thought big. They wanted to be important, and they wanted to be strong.
Community banks make a point, though, of being community-minded. They say they don’t want to become big. They do, however, want to be strong. Because otherwise they become like The Community Bank in Brockton, which last week agreed to be gobbled up by Eastern Bank.
The Community Bank is a $324 million bank. Eastern has $8 billion. Eastern has been thinking big for a while, expanding into insurance, offering correspondent services, buying up other banks. The Community Bank was also thinking big, but not big enough. Over the years, it expanded with a few branches, all within its small community. Now, Eastern Bank will be serving that community. And it’s a pretty sure bet that Eastern will be a little more dispassionate about who it’s lending to in Brockton, Bridgewater, Lakeville and Sandwich. For The Community Bank, those towns were the universe. For Eastern, they’re just part of the galaxy.
Eastern doesn’t have any community bankers. They’ve all been fired. Eastern has bankers – period. And that’s why they’re winning.
Management Hubris
As far as I know, there hasn’t been a scientific study of community banking. But there has been one of the mutual fund industry, and there are lessons in it for community bankers.
In June, the Indiana University Kelley School of Business unveiled the first research to document and quantify a “familiarity bias” among professional investors. What they found was that mutual fund managers who favor home-state stocks – essentially, investing locally in companies that they “know” – run the most inefficient funds, and rack up about $31 billion annually in excessive risk.
These fund managers “tilt their portfolios toward stocks from their home states, but their inability to deliver superior performance indicates this overweighting is not driven by concrete information,” said co-author Scott E. Yonker, assistant professor of finance at Kelley. “A weakening in the local economy of the fund manager’s home could unnecessarily harm portfolio performance.”
Note that the study doesn’t say that community-minded funds aren’t profitable. It says they aren’t as profitable, and carry more risk than funds run by managers who aren’t biased towards what’s familiar – companies in town, close at hand.
“We’ve shown that … less sophisticated managers invest in what they ‘know’ — or think they know,” said co-author Noah Stoffman, an assistant professor of finance at the university.
It’s not hard to see the parallels here to banking. Community bankers often talk about how they’re committed to lending in their towns, and they speak about the benefits of “knowing the community.” But maybe it’s that very familiarity that keeps them from making the hard decisions to turn down a marginal credit, to get tough on a faltering borrower, or to seek out more profitable business beyond the confines of the community.
Like the mutual fund managers, it’s not that community banks aren’t making money, but that they may be exposing themselves to additional risk they’re not even aware of. Recognizing that isn’t the fault of the bank, but the bankers.
Maybe what’s needed are bankers who care less about the community and more about the bank. This is an issue of human nature. If the people running the bank are themselves heavily invested in the local community – meaning they were born and raised there, they live there, they’re buddies with the business owners who pal around at the country club – they’re a lot less able to be old-hearted about looking out for the community’s interests. The bigger banks don’t have that disability; their geography is too large.
That’s why, perhaps, community banks ought to stop hiring and promoting community bankers. Instead, they ought to be focusing on bringing in the most driven financial talent possible. If that means getting someone from Philadelphia to sit on a senior management team in Cohassett, so be it.
If community banks want a future in which they can co-exist and compete with the large banks, they’ve got to perform like large banks. This isn’t a competition of technology or advertising. It’s a competition of strategy and performance. To win, you need to think big-picture.
Just look at Eastern Bank and The Community Bank. One had leaders thinking big, the other had executives focused on the familiar. There’s a lesson there. If community banks want to compete, they need to get rid of the community bankers – before someone else does it for them.
Vincent M. Valvo is CEO of Agility Resources Group LLC. He may be reached at vvalvo@agilityresourcesgroup.com.
