community banks renewed purpose part 1

www.communityleader.com

Renewed Purpose and Survival through Crowdfunding.

by Kim Kaselionis and Joseph Barisonzi

Community Banks

book I, Version 1 (July 2013 )Part I: Banking with Purpose

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Abstract

As Part I in the series, this whitepaper provides community bankers with the

necessary framework upon which to build an irrefutable case for immediate

implementation of a crowdfunding strategy. The paper presents the components of

this framework as follows:

Defines community banks by size, philosophy, and activities;

Establishes community banks as an essential institution in the United States;

Details recent challenges and current threats to the vitality of the community

banking tradition;

Discusses the impact of these threats on the ability of community bankers to

maintain the client relationships critical to remaining competitive and serving

the core purpose of community banking;

Introduces the opportunity and necessity for community banks to participate

in an exciting, emerging capital market through the immediate implementation

of a crowdfunding strategy; and

Sets the stage for community bank leaders to effectively use the two

additional white papers in this series to instigate the proactive change—

engagement in securities-based crowdfunding—critical to thriving in the

competitive landscape being carved by the powerful wave of crowdfunding.

CL_banks_414_Layout 1 4/30/14 9:34 AM

Banking with Purpose

Unlike larger banking institutions, community banks (defined here as having more

than $2 billion in assets) have a strong tradition and clear purpose in their role as

fundamental components of local communities. As such, community banks serve

an essential function for individual people and businesses, local communities and

the economy at both the local and national levels. The viability of community banks

has been and continues to be threatened significantly by economic pressures,

competition from big banks, burdens imposed by legislation and regulatory

oversight, and changes in underwriting practices. As a result, the very existence of

genuine community banking is at stake. Without immediate, proactive change on

the part of community bank leaders, the nation will continue to see a decrease in

the percentage of assets and deposits held by community banks and, perhaps

more importantly, those that remain will no longer serve the vital function nor carry

on the valuable tradition that makes a community bank just that—a bank truly of

and for the community. The following describes the strong tradition and essential

function of community banks, outlines the major threats to this tradition, and

presents clear evidence of the necessity for immediate, innovative change. In

conclusion, the paper points to crowdfunding as a critical next step for community

banks to thrive moving forward.

1

According to the FDIC,there has been a 33.25%

decline in banks <10Bsince 2000. (FDIC

“Statistics on DepositoryInstitutions”)

"Community banking is, at its core, very democratic — a kind of 'for the people

– by the people' page out of the Constitution. Deposits are gathered from the

community and reinvested into the community driven by the decisions of leader

representatives of the community."

~ Kim Kaselionis, co-author and former CEO/Chairman of Circle Bank

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Community banks play avital role in the U.S.economy by allocatingcredit and providingfinancial services in theircommunities— particularlyto the small businesses inthose communities.

(Gilbert)

The Community Tradition

The characteristics of a community bank, as understood by a layperson, are

generally limited to geographic location and possibly size. Members of the banking

industry, however, know that the concept of the c ommunity bank is rich with

tradition and purpose. What truly defines community banks is an underlying

philosophy—the recognition and honoring of the symbiotic relationship between

bank and community. In terms of size, a community bank is defined here as holding

under $2 billion in assets; however, as the Federal Deposit Insurance Corporation

(FDIC) notes in its 2012 Community Banking Study, a community bank is better

defined by considering its activities in addition to its assets.

Personalized Service

Guided by a purpose running deeper than the desire to increase profit margins,

community banks serve themselves by serving their communities. The mutually

beneficial relationship between these banks and the families and businesses in their

communities is evidenced by the many families and family-owned businesses that

remain loyal customers of these financial institutions from one generation to the

next. The personalized service customers receive at a community bank is at the

essence of the bank’s competitive advantage and drives client loyalty. While many

larger institutions may scoff at the circumstances of specific people, families and

businesses, community banks embrace the unique and evolving needs of each

client at the core of their service model. In doing so, community banks demonstrate

their dedication to promoting the financial dignity of their client base. Individual

circumstances require individualized services, products and solutions. Historically

and to this day, community bankers strive to offer their clients just that.

Essential for Local Communities

The community bank has always been an essential economic development

resource and advocate for the health and vitality of a local community. Traditionally,

as individuals deposited their money into accounts, that money was reinvested by

the bank into the homes and businesses around it. Through the lending process,

the bank conducted due diligence, making sound investment choices with

residents’ money. Community bank loans are the foundation upon which local

businesses have been built and grown. The concept of community reinvestment—

of doing business with and for local residents and businesses—still pulses through

the hearts of community banks and their leaders.

2

"Without the economic leadership of community banks, the economic

development—including affordable housing production—of our community

development financial institutions (CDFIs) and community development

corporations (CDCs) would be impossible."

~ Joseph Barisonzi, co-author & CEO CommunityLeader


Bridging Gaps

The survival of community banks is essential not only to local communities, but to

groups that fall into the current funding holes in the industry. The continued viability

of these banks is critical to individuals, businesses, and communities that would

otherwise have no real banking options. Significant gaps exist in the distribution of

capital—many of which are linked to gender, race and geography. The

discrepancies that exist between financing provided to women- and minority-

owned businesses and other businesses are startling.

Without community banks, many of the country’s rural areas, small t owns,

moderately-sized cities and inner cities would be left with no judicious choices for

financial services. Many millions of individuals and businesses, even in the hearts of

major cities, would find themselves choosing between financial ruin and alternative

lending options that are problematic to say the least. The staggering number of

people and companies in the U.S. with sound business ideas and opportunities—

but insufficient or tarnished credit and/or little-to-no collateral—would be left with no

options beyond check-cashing and payday shops, which usually prove to be mere

stops along the road to bankruptcy or worse. The community banking tradition of

serving individual clients and bridging funding gaps is vital to the banking industry

and can be traced back to the very roots of banking in the U.S.—roots without

which the community banking industry cannot survive.

Beyond Local Impact

Community banks have always taken the lead in local economic development, but

they are just as essential to the health of the national economy and overall efficacy

of the U.S. banking sector. By consistently reaffirming the importance of

relationship-banking, community banks keep banking in the U.S. customer-

focused—a characteristic that might otherwise fade from the industry. The people

and businesses served by community banks represent not only a significant portion

of the nation’s assets, but the majority of its jobs. Economic development studies

consistently point to the essential role of small- to medium-sized businesses (SMBs)

in job growth, which results in stabilized home values, increased tax revenue, and

reduction of debt. In light of the vital role community banks play in SMB lending, the

far-reaching significance of their survival is irrefutable. In addition to their impact on

the national unemployment rate, housing market, banking sector and debt,

community banks contribute categorically to the number of individuals able to

participate in the economy by serving otherwise “unbanked” or “underbanked”

households across the nation.

...from an economicviewpoint, [community

banks] remain very importantin specific business and

economic sectors, notablysmall-business and

agricultural lending. Smallbusinesses play a critical role

in the U.S. economy as awhole and in economic

growth in particular, so theirability to find credit and

where they find it is ofconsequence.

(Critchfield et al, FDIC)

3



Important Leaders and Advocates

Community bank managers have long been important and visible community

leaders. Skillfully wielding the economic power of the bank, they have guided

private investment and supported businesses in establishing the necessary

foundations from which to grow organically. Bank leaders have engaged their local

communities on multiple other levels by directing civic and government

organizations, running task forces, leading service clubs and sponsoring local

scholarships and c harities. Motivated by a tradition of thinking and acting locally—

one that significantly pre-dates the current trendiness of these

concepts—community bankers take pride in advocating for economic and social

initiatives that improve the lives of the people with whom they live and work.

Overwhelming Challenges

Over the past 15 years, the leadership of community banks has seen the business

of banking change focus from attending to the needs of its clients and community

to redirecting time, energy and resources to grapple with relentless competition

from big banks, the increased burden of regulatory compliance and more restrictive

underwriting policies—not to mention the tremendous economic pressures that

define a recession. The result has been the stifling of bank leaders in taking action

consistent with the basic ideological foundation of the community banking tradition.

4

"Bankers have the business acumen, the financial resources and the 'will' to make

things happen—to contribute to the stewardship of boards and committees in

their community—to enrich the lives of their constituents."



Big Banks: Take-overs and Competition

With the onset of financial crisis in 2008, community banks met with what has

proven to be an insurmountable challenge. In the years since, hundreds of

community banks have failed or been acquired by larger financial institutions, while

many of those that remain continue to struggle. National studies indicate a clear

decrease in the number of small banks since 2000, while the number of large banks

has risen. Bank failures during 2013 comprised primarily community banks, while

the trend since 2010 has been a decrease in larger bank failures. At present, a

disproportionately high percentage of U.S. banking assets and domestic deposits

are held by just a handful of the nation’s largest banks. There is no denying the

crushing impact competition from larger banks has had on the community banking

industry and, thus, on the ability of local communities to have their banking needs met.

At present, a disproportionately high percentage of U.S. banking assets and domestic

deposits are held by just a handful of the nation’s largest banks. There is no denying

the crushing impact competition from larger banks has had on the community banking

industry and, thus, on the ability of local communities to have their banking needs met.

In 2013 there wasonly one bank with

assets over $1billion that failed.

(Tumin)

5



So the challenge of all theregulations that dictate whatthe product should look like isthat they also dictate what thecustomer should look like andit leaves less flexibility.

(Pinkett)

Legislation and Oversight: To the “Rescue”

Over the years, lawmakers have made attempts to pass legislation supporting the

reinvestment of local deposits into the community while protecting consumers (see

“Timeline of Major Relevant Legislation”). It should follow, then, that such efforts

would work in favor of community banks, since they are so inherently tied to the

health of the communities around them. Unfortunately, legislative efforts to support

communities have fallen short, proving to be largely ineffective and, in many cases,

actually creating additional problems for community banks. The addition and

adjustment of specific legislation, regulations, and oversight directives has resulted

in little to no relief for community banks or the communities they serve, while their

cumulative effect has become an increasingly heavy burden.

Anyone involved in the banking industry is aware of the enormous compliance costs

to banks—large, mid-sized, and small—resulting from the Bank Secrecy Act (BSA)

of 1970. The expenses associated with acquiring required technology systems,

hiring and training personnel, compensating auditors and consultants, and filing

paperwork were astonishing. Forty-four years later, these costs remain significant

for all banks and often crippling for small- and mid-sized banks.

In 1977, the Community Reinvestment Act (CRA) required that a bank’s

contributions to its local community be taken into consideration by regulators. Due

to the fairly vague nature of this legislation, its initial impact was small in comparison

to that of the BSA; however, later reform of the CRA proved significant as specific

requirements were set. As a result of these reforms, several federal banking

regulatory agencies (e.g., the FDIC) have been tasked with financial institutions

compliance with regard to community reinvestment, thus adding further to the

existing hardship of maintaining compliance.

6


While all banks have experienced an increase in direct costs and overhead

associated with the onslaught of additional regulations and oversight, new

requirements are far more problematic for community banks due to their size and

resource limitations. Resources that might otherwise be dedicated to serving

customers and expanding business are expended instead on dealing with red tape

and the many other demands of staying on top of compliance obligations as noted

above.

Studies following the enactment of the Dodd-Frank Wall Street Reform and

Consumer Protection Act (Dodd-Frank) in 2010 clearly evidence the

disproportionate nature of regulatory burden on community banks. Since the

enactment of Dodd-Frank, the U.S. banking asset and domestic deposit shares

held by small banks have seen a -18.6% and -9.8% change, respectively. During

this same period, the number of small banks decreased by 9.5%. These numbers

make it painfully obvious that, for community banks, the various costs associated

with new compliance obligations have far outweighed the benefits.

Underwriting and Underfunding

In addition to the stresses imposed by legislation, regulation and oversight during

the last decade, community banks have been hard-pressed to meet the needs of

their communities due to the increasingly strict underwriting parameters within

which they must operate. The relationship-banking that defines this banking

tradition relies largely on “soft data”—but with increased pressures and restrictions,

community bankers have less professional discretion to use their first-hand

knowledge of clients to grant credit. There is no arena in which this is more painfully

apparent than that of construction and development loan-granting.

Beginning around 2006 and throughout the housing slump that followed, regulators

became steadily more concerned about the increasing exposure, especially for

small banks, created by specific lending practices involving construction and

development loans. As a matter of practice, development loans include an initial

interest reserve repayment allowance. When a construction project misses its

completion date or experiences a cost overrun causing an “out of balance”

situation, banks have been known to extend additional credit to continue funding

A large majority of respondentsviewed Dodd-Frank as more

burdensome than the BankSecrecy Act, and the

participating banks reportedsubstantially increased

compliance costs in the wakeof new regulations.

(Mercatus Center's Small BankSurvey, which included 200banks across 41 states with

greater than $10 billion inassets, serving mostly rural and

small metropolitan markets)

7



Over the last few years, smallbusiness owners have turnedto alternative lending sourcesto fill the gap left by thecommunity bankers … but theyare still more expensive than atraditional small business loanfrom the local bank.

(Kiisel)

interest payments. Regulators consider this extension of credit extremely

problematic in that it can mask potential loan problems; therefore, once the

economy fell into crisis, regulators became extra vigilant in identifying and enforcing

against it.

Since then, banks in this situation have been required to reclassify development

loans as “non-performing,” recast the allowance for loan and lease losses (ALLL),

and replenish reserves as necessary to bring or keep balances within policy

guidelines. Repeat violations in this area subject board and bank personnel to

severe regulatory criticism and, in some instances, regulatory action. As a result,

small- and mid-sized banks have to be extremely cautious when reinvesting in local

communities by granting construction or development loans—one of the most

critical functions of any community bank. In the absence of funding, local

construction and development companies have been forced to down-size,

eliminating important jobs and essential economic activity in the community.

The constriction of underwriting flexibility has taken a great toll on the viability of

community banking as a business and, due to the symbiotic relationship between

bank and community, on the health of the individuals, families, organizations and

businesses around them. Many essential local businesses and worthy

neighborhood projects have scrambled for financing, unable to qualify for funding

despite the support and dedication of their community bankers. Paralyzed by

restrictive underwriting guidelines, too many bank managers now find themselves

unable to fulfill the core purpose that attracted them to community banking in the

first place – helping to meet the needs and realize the dreams of the communities in

which they live. As relationship-lending is curtailed, so too are livelihoods.

8

"Some of the very principals of granting credit—the '5C's' or Character, Capacity,

Collateral, Capital, and Condition—draw upon knowledge of members in the

community itself: The first, character, refers to a borrower's reputation. One

reason community banking is successful is that the stewards of the bank generally

know the borrowers in the town."



Community Banks Must Make a Way

The staggering impact of relentless competition from big banks, the increased

burden of regulatory compliance, more restrictive underwriting policies and

tremendous economic pressures has left the community banking industry in a

precarious situation. Without a way to meet the needs of their clients, community

bankers are witnessing the disintegration of relationships vital to both their survival

and their ability to accomplish their underlying goals. The stress on community

banking relationships will only increase as the funding industry faces the new and

substantial threat of nonbank competition.

Will Without A Way

Community bank leaders want to provide their clients with the products and

services they need. Community bank clients want to find what they need at their

community banks as opposed to looking elsewhere. There is no question that both

community bankers and their clients have the will to maintain the strong bank-client

relationships that have served both well since the first banks were opened in the

U.S. The problem community banks face, then, is that they often lack the means to

act on the will to support their communities. The frustration resulting from having

the will without a way to act on it is felt by bankers and customers alike.

As community banks have struggled to survive, the leaders behind these banks

have faced a constant battle to maintain any semblance of the role they once

played in their communities. Due to the accumulation of adverse circumstances,

most bankers are unable to offer clients the wide diversity of products they once

did. Once strong supporters of local economic and social growth, many community

bankers have been stifled by external forces and left without the tools—diverse

products and the ability to approve loans based on “soft criteria”—necessary to

enact meaningful change. Once autonomous and influential leaders have been

reduced to regional managers with little control over local lending and while many

maintain the will to support their communities, they find themselves challenged by

an environment that consistently hinders that work. Community bankers who have

managed to cling to some autonomy are forced to devote their attention to the

busywork and stress of banking in an industry pocked with compliance risks.

Instead of growing the relationships that community banks are known for, bank

leaders are continually distracted by whether or not the bank is meeting criteria,

filing reports, or maintaining underwriting practices. As the business of banking

becomes increasingly difficult, the quality of banking relationships inherently

diminishes. As bank managers are forced to turn away clients requesting capital,

customers are forced to seek funding elsewhere.

America's 7,000community banks,

including those located inrural and small towns, are

dedicated to lending intheir communities and

supporting their broad-based economic recovery.

(Loving)

9



The needs of homogenousconsumers can be met withhomogenous products, but theassumption that consumers arehomogenous is wrong.

(Pierce, Testimony)

Crowdfunding is the Way

There is more than one way for a bank to fail. Community banks that remain open

but lose their ability to make positive change in their communities are no more

surviving than those that close their doors. A community bank fails when it is no

longer able to adequately serve the people and businesses in the community

around it. It fails when its clients must resort to check-cashing, payday loans, and

other alternative lending options that trap borrowers in a downward spiral of debt

and drain the community of its economic potential.

In order to remain true to the tradition of serving their communities and able to

provide their customers with the products and services they need, community

bankers must rethink their business models, adapt new solutions to meet the

changing needs of their communities and abandon long-held beliefs that have

become irrelevant in light of the landscape emerging before them. This is an

important moment in the history of community banking and the market capital

industry as a whole—a tumultuous moment requiring transformative, proactive

change. Community banks that refuse to evolve and take some calculated risks will

not survive.

Fortunately, in addition to the ways in which community banks can fail, there is a

way in which they can thrive and, thus, support the communities around them to

thrive as well. Thanks to recent legislation in the form of the JOBS Act (see

“Timeline of Major Relevant Legislation”), community banks and their clients have a

clear way to maintain the strong, vital relationships upon which the rich tradition of

community banking was built. Crowdfunding is the way. As an increasingly popular

funding vehicle and viable alternative to traditional bank debt, crowdfunding is the

innovative, intelligent way for community bankers to offer clients a wider array of

options. In the face of big- and non-bank competition, technological advances,

market pressures, changing political and social attitudes, and shifting customer

expectations, now is the time to embrace crowdfunding to the advantage of their

banks and communities. Those who wait until crowdfunding is a mainstream

lending alternative will find themselves drowning in the aftermath of this powerful

wave of change.

10

"While others focus on the 'crowd' aspect of the new technology and

deregulations, community bankers will immediately recognize that these emerging

vehicles open the door to more robust 'community'- funding opportunities."

~ Joseph Barisonzi, co-author & CEO CommunityLeader


Conclusion

Community banks have always had a deep tradition of sharing a symbiotic

relationship with the residents and businesses around them in addition to serving an

essential function within the U.S. economy and banking sector. Unfortunately,

recent years have been extremely hard on both community banks and the

communities they serve. Economic pressures, fiduciary responsibilities, regulatory

burdens and increasingly-rigid underwriting policies have all taken a heavy toll on

community banks, causing many to fail or be forced into premature sale or merger.

As a result, community bankers across the country have been hindered in their

ability to do the very thing that defines them: support their local communities.

In this already bleak landscape, a new threat—competition from nonbanks—is

burgeoning, further eroding the stability of the community banking tradition. In these

dire circumstances, a question weighs on the minds of anyone leading a

community bank: “Are there any viable options left for community banks?”

Fortunately, the answer is: “Yes.” A tremendous wave is building in the sea of the

funding industry and community banks have the option of positioning themselves to

ride its momentum into the future. That wave is crowdfunding, and community

banks that intelligently engage it through the development and implementation of a

crowdfunding strategy can harness its energy to propel themselves back into

position as formidable competitors and effective supporters of their communities.

Whether welcome or not, crowdfunding has already begun to surge through the

financial sector and all signs indicate it is unlikely to subside anytime soon.

Community banks that wait to act—hoping to float over this wave of change—are

likely to be pulled down in the undertow. Engaging in crowdfunding is no small task;

in order to position their institutions effectively, bank leaders will have to persuade

board members, gain a basic understanding of crowdfunding as it relates to

community banking, consider the pros and cons associated with securities-based

crowdfunding, and identify an appropriate platform to meet their needs. Fortunately,

there are companies with the knowledge, experience and services necessary to

help community bankers catch the crowdfunding wave and maintain the ride as

effective advocates for their communities once again.

11


About the Authors

Joseph Barisonzi, [email protected]

Joseph Barisonzi is the Co-founder and CEO of CommunityLeader, Inc.

CommunityLeader is the premier provider of platform solutions for the online

solicitation, sale and support of private securities. CommunityLeader's integrated,

white-labled platform is used by many of the leading crowdfunding sites in the United

States. Mr. Barisonzi has co-authored numerous whitepapers on crowdfunding and

published "Navigating your Portal Launch" as an eBook in 2013.

An accomplished senior executive with over 20 years of leadership experience in

community and business development, Mr. Barisonzi is one of the leading voices for

a community-based approach to crowdfunding. Mr Barisonzi resides with his spouse

and daughter in Minnesota, where he is active with many community and civic

organizations.

Kim Kaselionis, founder & managing [email protected]

Kim Kaselionis is the former CEO/Chairman of Circle Bank, where she led the

Northern California Community Bank to 53 consecutive profitable quarters and

developed the brand from a single-branch bank to one with six locations, managing

more than $300 million in total assets. Under the leadership of Ms. Kaselionis, the

once near-insolvent bank was sold to Umpqua Bank in late 2012.

Winner of numerous industry and community awards, Ms. Kaselionis aims to utilize

her 20 years of community banking expertise to become the leader in community

banking via the facilitation of crowdfunded equity and debt.



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10 Please see “The Roles of the Security Team”on page 18

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Treasury, N.d. <http://www.fincen.gov/statutes_regs/bsa/> Web. 7 April 2014. CRA:"Community Reinvestment Act (CRA)." Board of

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End Notes


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