Community Banks See Advantage When Big Banks Struggle

The banking industry took a hit during the economic downturn, but some involved in banking believe the tide is turning for the better. Capital Bank of New Jersey President and CEO David Hanrahan said “the industry is getting healthier and healing.” He also said community banks are in a better position than larger institutions, which can only grow so much. He sat down with NJ Today Managing Editor Mike Schneider to discussing New Jersey’s banking industry.

While Hanrahan said things are looking up for the banking industry with improved earnings, lower delinquency rates and lower provisions for loan losses, he said there are challenges, including lack of capital, a high level of non-performing assets and regulatory stress.

“Banks need to be able to grow and they need their capital to be able to keep pace with their assets. If they’re not earning good money or if they’re having to sock away more money for problem loans, that hurts their capital base and inhibits their ability to grow,” Hanrahan explained. “It’s also a time when banks’ stocks tend to be out of favor with investors so it’s difficult to raise capital, especially if you don’t have a strong story to tell right now.”

Capital Bank of New Jersey had a record-breaking initial public offering in southern New Jersey at $20 million. Hanrahan said problems at big banks offer smaller institutions an opportunity.

“While a number of community banks are struggling right now, if you are a well capitalized, well run community bank like Capital Bank of New Jersey is, this is a terrific time to be a community banker because the big banks can only grow so much more and while they’re good at a lot of things, they’re not good at small business lending and local commercial real estate lending which is classically what a community bank does well,” he said. “We’ve grown because people are increasingly dissatisfied with their big bank and choosing to come to little banks like us so we’ve been growing by taking market share from others.”

Hanrahan said residential mortgage lending is not a major part of his bank, but the housing situation still has some effect on business. “It effects confidence,” he said.

Capital Bank of New Jersey operates in Cumberland County, which Hanrahan said is statistically one of the most economically challenged in the state. “We’re accustomed to growing our business and banking in an environment that is not necessarily favorable,” he said.

Although Hanrahan is optimistic about the banking industry, he still worries about the future.

“I don’t know if we’ve touched bottom or if we’re out of the woods in the economy,” he said. “We run our shop not counting on economic recovery but making a case by case assessment of every business owner that we lend to and the fundamentals of his or her business.”