I’ve been writing occasional articles about the “keys to success” for banks – large and small – as described by JP Morgan CEO Jamie Dimon. I have received much feedback about these articles and I do, of course, appreciate each note of comment.
Today, I will write about the practices of a small town banker, my father. He owned a bank in Lancaster Missouri for about a decade before retiring in 1984. This was a different era and when comparing it to modern day banking, it almost seems like “It’s a Wonderful Life!” My father may not have been George Bailey, but there were certainly similarities.
Let’s take the case of Marcus Wainright (the name is fictitious). Marcus was a painter in our small town. I remember two things about him; he always had a cigarette dangling from his mouth and was always dressed in white overalls. Though I did not really realize it at the time, Marcus also spent a lot of time hanging out at the local “tap” and as I grew older, it started to register that he was likely spending too much time there. With that said, Marcus was a good man and a hard worker.
Well, it turns out that Marcus was also a customer of my father’s small bank. He was a regular borrower, though in tiny amounts (remember, this was the late 1960’s) and, as I recall, the amount of his standard loan was less than $50. Once I started working a summer job in the bank, I learned about different aspects of banking. One aspect was the cigar box. You see, Dad kept a cigar box in his desk that was full of cash and pieces of paper (promissory notes). For lack of a better term, I’ll call this the bank “kitty.” He used the money in this cigar box to make small loans to less than creditworthy borrowers who were in tough times. Why the cigar box? That’s easy. These loans would have been criticized by any responsible bank examiner So, in a sense, they were off balance sheet loans that were being used to help those in the community who were in need. I do not recall the interest rate charged other than it was nominal and certainly not exorbitant.
I’ve often thought of Marcus as I have watched my own industry in 2016 continue to be strangled by one regulation after another that makes small dollar lending problematic. If one considers customers with marginal creditworthiness, regulation has made it very difficult in our industry to justify the time and regulatory burden to make these loans. As an example, if the customer falls past due (and marginal borrowers have that happen from time to time and sometimes, frequently), the expense to comply with regulations regarding trying to bring the loan current is mind boggling. We can only make phone calls at certain times. We have to log every call we make (yes, really). All Dad would do is tell Marcus when he saw him “you need to get a payment in.” And, eventually, the payment always came in.
It is entirely accurate to say that if this were 2016, Dad would not be engaged in this sort of lending. Were the “cigar box” issue to surface during a bank examination, the bank and the banker would be subject to severe reprimand. On the other hand, as I have regularly pointed out, I am not sure Marcus would have been able to secure a loan from any bank in today’s regulatory climate. Perhaps a payday lender or check cashing service would have served him, but probably not a bank.
Skeptics reading this might say Mr. Funk was playing outside the lines. Or that Mr. Funk was running a loan shark business or something else. No! He was trying to help a member of the community who struggled on a regular basis to make ends meet. The easiest way to do this was to fund the cigar box. In other words, that community banker’s heart was in the right place.
The bottom line? One day when I was home from college, Dad and I were discussing Marcus and the way in which the bank had helped him. By that time, Marcus was aging and had health problems and I asked Dad what would happen when he died. Dad said “I guess we’ll just have to put a little more money in the cigar box.” To be more explicit, those loans would never ever be collected. And, somehow, I think that was ok.