Community banking: it's who we are. It's what we do

RMA Journal, The, April, 2003 by Kathleen M. Beans

An interview with Richard L. Harbaugh.

Rick Harbaugh's mission is for Equitable Federal Savings Bank to serve the financial needs of the community of Grand Island, Nebraska. For Rick, the mission began when he joined the bank as president and chief executive officer in 2000. For the bank, the mission began on August 29, 1881, shortly after the town was incorporated by a small group of pioneers. With assets of $149 million, Equitable has been growing stronger each year by using a straightforward strategy of hometown investing and hometown lending to achieve hometown growth. The bank lends only to individuals and businesses within a 50-mile radius of 'Grand Island.

KB: Could you tell me about your banking career?

RH: My career began in 1967 when I worked as a management trainee for American Loan Plan, a consumer finance company in Omaha. American Loan Plan was subsequently purchased by AVCO Financial Services, and I worked for them in various capacities as branch and office manager until 1973. During my tenure there, I managed offices in Liberty, Missouri; Davenport, Iowa; and Grand Island, Nebraska.

In 1973 I joined Commercial National Bank in Grand Island as a consumer loan officer, eventually becoming the head of the Commercial Loan Department, where I was also responsible for internal loan review and policy development and implementation.

Commercial National Bank was a single-unit banking charter, and at that time we were a $70 million bank. I left them in 1979 to join First National of Kearney, in Kearney, Nebraska, as executive vice president. In 1982 I was promoted to bank president. In 1995, I became president of Overland National Bank and was transferred back to Grand Island. Both First National and Overland were affiliates of First Commerce BanoShares.

First Commerce BancShares was a multibank holding company in the state of Nebraska and had individual bank charters in most of the larger communities in the state. I was with Overland until June 2000, at which time First Commerce BancShares was acquired by a multinational banking operation.

I took Overland through the conversion with the new bank, and then the opportunity with Equitable Federal Savings Bank came along. I liked Equitable's community banking flavor and the fact that it wanted to change its strategic direction to move from a traditional thrift, a one- to four-family residential real estate lender to a full-scale commercial banking enterprise. So in November 2000 I came on board as president and chief executive officer.

KB: Unlike Overland, Equitable is a thrift. How does it differ managing a thrift as compared to a commercial bank?

RH: There are unique nuances to both banking disciplines. A traditional thrift charter is primarily for development and creation of mortgage lending for one- to four-family residential dwellings. Equitable's original mission statement was to provide for home ownership and to foster thrift among its participants. So, the bank's strategic mission has not changed much inl2O years.

When I came on board in 2000, we began to change our strategic focus to include all the aspects of commercial lending. We had to bring Equitable's charter up-to-date so it would have the ability to act as a commercial bank.

In 2001, thrifts from throughout Nebraska successfully initiated state legislation to allow federally chartered, mutually owned financial institutions to be able to accept deposits from state and local political subdivisions. (Equitable is a mutual company because it is owned by its depositors and not by a group of stockholders.) This legislation, which went into effect in September 2001, leveled the playing field for mutual thrifts, permitting them to act in the same capacities as commercial banking enterprises and stock financial companies. We are now able to accept public funds and provide commercial banking services.

A thrift differs from a commercial bank in that it needs to maintain a certain percentage of its total assets in real-estate-type loans or securities such as loans for the purchase, refinance, construction, improvement, or repair of residential real estate. To maintain our thrift charter we have to pass the Qualified Thrift Lender test, or QTL. To do that we have to fill out a worksheet on a quarterly basis that shows our asset allocation in these various categories. We have to keep our non-real-estate loan growth in balance to continue to maintain our thrift charter.

KB: Is that balance difficult to maintain?

RH: It has not been a difficult problem because currently about 70% of our total assets are in qualifying residential real estate assets.

KB: How did you develop commercial lending at Equitable?

RH: It was a complete change of strategic focus. Equitable had never been involved in commercial lending. It had begun to do some consumer lending, but mostly consumer lending based on the equity people had in their homes. So we had to ramp up a whole new operating division, and we had to hire the expertise to handle it. I was fortunate to acquire a couple of talented individuals with significant commercial lending experience in this marketplace. They had worked for me at Overland. We have been able to grow a solid commercial portfolio in that time frame. We've probably generated about $25 million in new loans in the last year and a half to two years. In a large market that doesn't sound like very much, but when you figure that it now represents 25% or greater of our total assets, it is a significant increase in the composition of our balance sheet.