Strong Community Banks Prove Small Is Better

When one walks into the dining room at Sterling National Bank’s Fifth Avenue headquarters (Stock Quote: STL), there’s an immediate sense of old world elegance. The Victorian furniture is impressive, a grandfather clock stands in the corner and it feels like you’ve just walked into an old and exclusive hotel in Venice.  In both form and function, this is old school banking.

Sterling’s clients, most of which are small businesses and professionals, are invited to brunch regularly. The food is prepared by the in-house kitchen and these meals are an opportunity for the president, John Millman, and chairman, Louis Cappelli, to chat with their clients, hoping to grow the relationships over poached eggs and orange juice.

“Every day the chairman, the president and senior loan officers are here actively meeting with small and midsize companies,” says Millman. “To us a small business is a very important customer.”

In Banking, Is Bigger Always Better?
Big banks like CitiGroup (Stock Quote: C) and Bank of America (Stock Quote: BAC) move hundreds of millions of dollars in business loans every day and cut business clients on a large scale. For some small business owners, doing business with the large institutions has drawbacks.

“Big banks only care about numbers whereas for community banks customers are treated like real people,” said Dan Deighan, CEO of Deighan Financial Advisors, a financial consulting firm in Melbourne, Fla.

Although many smaller community banks like Sterling move a lower volume of capital compared with the big banks, they conduct their business in a more personal manner, emphasizing the long-term customer relationship. Many community banks, which in this economic climate are often more able to lend than big banks, see an opportunity for growth.

“Relatively speaking at least, community banks are doing better as a group than other segments of our financial system,” said Fed Chairman Ben Bernanke in a speech in March.  In Sterling’s case, the $2 billion small-cap community bank reported 11.4% growth in earnings in 2008 and 30% growth of net income from 2007. In the first quarter of 2009, Sterling has seen more new customers, although the numbers haven’t come out yet.

Finding Stability in an Unstable Economy

Community banks make up 96% of all banks in the U.S., according to the Independent Community Bankers of America, and most of those are still quite secure and sufficiently capitalized.

“Many have no subprime loans and stayed away from all of the exotic instruments. They are more conservative and traditional lenders,” said Paul Merski, chief economist at the association. Big banks over the years have practiced aggressive banking strategies. As a result they have billions of toxic assets on the books which in turn keep them from lending more freely.

The number of community banks increased 2% over the fourth quarter of 2008. The small business departments of many large banks are cash-strapped, Merski says, so small businesses shift to community banks not only for loans but for a closer borrowing relationship.

A Solid Relationship

“It's a relationship bank and senior executives are available. I can go all the way to the top,” says Timothy Bryan, chairman of an IT consulting firm named Galaxy Systems and a Sterling client. Bryan is a big fan of his frequent breakfasts and lunches with Sterling executives.