Community banking is a unique business, prevalent only in the United States. Community bankers are, also, a unique breed of people. The focus of their work rests squarely on doing that which promotes the quality of life of those people living within the designated community. Thus it is that community needs come first, followed by staff and then return for shareholders. Most community bankers do well financially, but nearly all could do better in a different line of work. Community bankers do what they do, because they feel a calling to serve their communities. It is truly an honor for me to work for and with those individual community bankers who are called to this community servitude.
Recently I have been asked several times by the media and others what the most important issues facing community bankers are today. My answer has been consistent:
- Overwhelming regulatory compliance burden is choking the life out of all banks, but particularly out of small community banks. Fixing this is a must.
- Unfair and untaxed competition, from credit unions and the Farm Credit System, adds to the challenge. Both entities have fewer regulations with which to comply, and they contribute little or no taxes to support federal and state governments, most of which are struggling financially. Community banks do manage to compete — I often wonder how — but making up 40 percent deficit from tax advantages is very difficult.
- Capital issues abound. Community banks have few options to raise capital to support growth that would provide more customers over whom to spread fixed costs, like compliance. Also the Federal Reserve Bank and Congress keep tinkering with what capital levels should be. Bankers are hard-pressed to make long-range capital and growth decisions, as this ping pong match over capital continues in Washington, DC.
- Rural America – the home of many community banks – presents additional challenges. While 16 million Americans choose to live in rural areas, community banks struggle to attract the professional staff and board directors needed to manage and direct the bank’s growth and compliance. The old song title/saying, “How ‘Ya Gonna Keep ‘Em Down on the Farm, After They’ve Seen Paree?” becomes truer with every generation.
- The current low interest-rate environment is squeezing community banks’ net interest margin to record lows. Unlike larger banks that have foreign trading operations, community banks are much more dependent upon interest spread. The reality is that community banks simply generate less noninterest income than their larger competitors.
Analyzing these issues leads to a scary conclusion: How long can the community bank model exist, without some sensible accommodations from Washington, DC? Yet survive they will, because community bankers persevere. I expect it is because of their calling!