Risk Rap

Rapping About a World at Risk

Reinventing Community Banks

Community Banks have been profoundly affected by the current crisis in the credit markets. Many will need to reposition their market focus and adopt innovative growth strategies to build its capital base and sustain profitability if they wish to remain independent.

Community banks have confronted drastic market challenges in the not to distant past. During the 90’s community banks dominance of the small and mid-size enterprise (SME) market began to erode. The dynamics of the banking industry changed rapidly. Large money center and regional banks leveraged technology, operational and balance sheet scale to provide access to inexpensive credit products bundled with cash management tools. They were armed with huge marketing budgets and became adept at selling a growing array of transaction services that met the growing sophistication and business needs of the lucrative SME market. The current banking crisis forebodes yet another drastic alteration in the structure, regulatory and businesses practices of the industry. The current banking crisis will forever alter the face and scope of community banking sector.

The challenge for the community bank will to reinvent itself. Community banks must decide who its customers are and target the market with focused precision. Community banks need to recognize its strength by leveraging its natural geographic advantages and sell products into markets that transcend local limitations. Community banks need to offer products that help SMEs manage cash flow and liquidity, make informed decisions on capital allocation initiatives, decrease cost of capital and products that facilitates transactions and fosters new customer acquisition.

Community banks must also begin to farm new liquidity pools. Securing funding sources in a world of limited liquidity will be the greatest challenge for community banks. Overcoming regulatory hurdles notwithstanding, branding community banks as a consistent, trusted and efficient delivery channel of credit products is an important ingredient for its survival. The community bank must recognize how it adds value in a complex and expanding delivery chain. The failure to secure funding sources will only accelerate balance sheet erosion that results in merging with another institution or liquidation.

The community bank must assure its funding sources, equity holders and regulators that it truly knows and understands its customer’s market and growth potential. This KYC goes deeper then determining an acceptable FICO score, Federal ID verification and passing an OFAC screen. Employing risk management and opportunity discovery exercises with SME prospects and clients are principal business drivers that provide critical disclosure information to funding sources that address risk aversion concerns.

Funding sources and other stakeholders must be secure in the knowledge that the community banker understands the peculiar risk characteristics of the SME’s strategy, business model and governance and risk management acumen to provide investors and lenders exceptional returns on investment capital and lines of credit. The banker then becomes an effective risk manager whose vigilance and considered business judgment provides a fair return to funding sources, assures regulators that capital ratios remain strong and reward shareholders with appreciating equity valuations.

Community banks are just one of the many expanding choices an SME has to provide banking and financing services. Community banks must create a compelling brand identity and articulate a differentiated value proposition with focused product marketing to regain its market dominance with SMEs.

You Tube Video: The Beatles, Money

Risk: Credit, Market, Banking, Small Business, Recession, Marketing,

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May 30, 2008 Posted by | banking, credit crisis, rock, SME | , , , , , , , , | Leave a comment

Anecdotal Evidence: Real Estate Market Rebounds!

My neighbor Hank has had his home on the market since the fall. He retired years ago and spent a good portion of his time attending to the care and maintenance of his beloved home that he has shared with his wife Judy for over 40 years. Last summer he decided it was time to move to an assisted living community. He bought a home in a senior community down by the Jersey Shore and put his place up for sale.

He just missed the real estate market peak in early 2007. He hung on to his beloved place a year too long. Soon after putting his home on the market the sub-prime mortgage meltdown hit and as the contagion spread through the credit markets Hank couldn’t get anyone to come to see his nice home. Over 6 or 7 months numerous open houses and a couple of St. Joseph statues buried around the property he had one offer that fell through because the buyer couldn’t get a mortgage. Hank now has two homes; one at the senior community with a new mortgage and his beloved home of 40 years which he could not sell. As a guy on a fixed income Hank was and still is in a pickle.

Yesterday I was doing the spring cleaning outside; getting the grass, garden and gutters ready for the summer. A real estate agent pulled up with an open house sign. She planted it into Hanks perfect lawn and entered the house. I said yeah, good luck. My skepticism soon turned to joy for Hank as car after car parked outside and went for the tour. He must have had 20 visitors. I would greet everyone with a smile, a wave and a cheery hello to try to do my part to help Hank sell his home.

Either the St. Joseph statues are working or maybe Bernanke’s interest rate cuts are adding a little liquidity to the credit markets. Hopefully this is going on across the country and hopefully things will get unstuck in the real estate market.

We’ll keep you posted on the state of the housing market from our little corner of the world and our business development plans to consider marketing St. Joseph statues.

You Tube Video: The Beatles, Fixin a Hole

Risk: credit; senior citizens; mortgages; real estate; fixed income

April 21, 2008 Posted by | Bernanke, community, credit crisis, pop, real estate | , , , , | Leave a comment