Small Is Beautiful

When it came time for Mell Monroe and his wife, Angela Higginbotham Monroe, to refinance their mortgage earlier this year, the couple shopped around for attractive rates. One bank offered a nice enough loan, but there was a catch. The bank wanted to charge the couple an extra fee to receive its lowest interest rate. Its representatives explained that they were assessing the fee because Monroe’s credit score had recently dropped 75 points because of a late payment.

Monroe wasn’t happy. He felt he wasn’t the credit risk his slightly blemished FICO score implied.

So the couple kept looking. In the end, the Monroes found a new lender in Illinois Service Federal Savings and Loan Association (No. 16 on the B.E. Banks list with $143.8 million in assets), a small community bank headquartered just five blocks from their home in Chicago’s Bronzeville neighborhood.

One of the bank’s executives knew Monroe from their work together as part of a community group. Illinois Service offered the Monroes a 30-year, fixed-rate mortgage at 5.4% with no extra fees. Since receiving their loan, the Monroes moved their savings and checking accounts to the bank. “I feel foolish that I didn’t do this a long

time ago,” says Monroe. “This bank has outstanding service and a real sense of kinship with the neighborhood. More importantly, they trust that we’re good folks and will pay our loans back.”

The banking industry’s problems are well known–perhaps too much so. Fortunately, consumers have choices that go beyond the big, national financial institutions. There are nearly 8,000 community banks in the U.S. and more than 50,000 branch locations; many of them are growing, innovating, and challenging their larger competitors for customers. This new movement among smaller banks comes after more than a decade of losing out to national, name-brand banking firms.

In 1994, for instance, community banks held the majority of U.S. deposits–70%. Today, only 30% of U.S. deposits are kept in community institutions. Experts believe consumers flocked to the larger banks because they offered more active products such as online banking, free ATM use, and free checking–at a time when community banks were hesitant to modernize.

Community banks see now as a perfect time to make their move. Many are offering the same innovative products as the big boys, without any of the worries. “Consumers are definitely waking up. And they’re realizing that the TARP-ridden mega-banks may not be

the most beneficial banking relationship for them over the long term,” notes Gabe Krajicek, CEO of BancVue, a consultancy that helps community banks modernize. BancVue provides software, marketing, and other services for more than 550 community banks.

“Consumers look at the news. They see the meltdowns that have taken place because of the large financial institutions and feel a real lack of confidence and trust,” says Karen Tyson, spokeswoman for the Independent Community Bankers of America, or ICBA, a trade association for nearly 5,000 community banks. “People are looking to work with a bank they trust, one they know is looking out for their best interests and the best interests of their communities. They find that with a community bank.”

That’s not just talk. In the first three months of 2009, ICBA member banks tripled their mortgage loan volume compared

to the same period in 2008. In a press release trumpeting the jump, Dave Petro, president and CEO of ICBA’s mortgage arm, called the increase “a dramatic indication that community bankers are regaining lost market shares in the residential mortgage arena. It also demonstrates that despite the challenging economic environment, our nation’s [community] banks are commonsense lenders that continue to lend to their customers in cities and towns throughout America.”

Although some smaller banks have run into trouble, “most of them avoided the crazy loans made by so many larger banks,” says Greg McBride, senior financial analyst at Bankrate.com. Thus, many community banks, including credit unions, are still making loans. A good number are also offering higher yields and lower fees than their larger competitors to attract deposits.

Sure, your local community bank might offer half a percentage point less on a money market deposit account than you could find online: that’s $50 a year (before tax) for every $10,000 you keep there. In return for giving up a smidgen of yield, you have the opportunity to deal with real people, face-to-face, and to resolve any problems personally. Mell Monroe, for instance, says he loves the fact that customer service reps at Illinois Service Federal recognize his voice when he calls.

Of course, there can be some drawbacks to community banks. For example, some offer limited products and services. Your local bank may not offer as many mortgage options, investments, annuities, and financial advisory services as JPMorgan Chase or Bank of America.

Even so, your local bank might offer you the best (or

only) deal you’ll find. “Officers and directors of local community banks have often lived in the same small town their entire lives,” says Bedda D’Angelo, president of Fiduciary Solutions, a financial planning firm in Durham, North Carolina.

“If you start hanging around the local Chamber of Commerce, you will meet attorneys, real estate agents, and bankers who went to school together and do business together. One of my former clients bought her house from a real estate agent who talked the executive lending officer of the community bank into approving a mortgage. The transaction would never have met Fannie Mae standards, but she got her loan.”

For customers like the Monroes, community banks are living up to their name as vital economic engines in their local environs. The couple is preparing a business plan to turn their five-bedroom 1890s historic Bronzeville home into a bed-and-breakfast. Where do they hope to get their small business loan?  Illinois Service Federal. Says Monroe, “When I talk to friends now who bank with those big, national banks, I ask them: ‘Do they really know you?’”

— John Simons contributed to this article.

This story originally appeared in the July 2009 issue of Black Enterprise magazine.