A passion for community banking

RMA Journal, The, April, 2005 by Richard L. Harbaugh

The April issue of The RMA Journal focuses on community banking. I hope you find value in the perspectives presented, from the cover interview with Glenn Wilson [p. 8] to an excellent tutorial on economic capital and how it relates to Basel II for community bankers from Robert L. Burns of the FDIC [p. 54]. Also, I'm proud of the continuing strides RMA is making in its commitment to community bank members by bringing its expanded offerings within reach through Web seminars and other channels. Please do also take a look at an overview of the responses from RMA's recent survey of community banks [p. 64].

I would like to take this opportunity to share my thoughts on the continuing importance and viability of community banking. I truly believe that community banking is a product of philosophy more than it is a product of size--that is, it's what you do and how you do it. Some may call it "niche" banking, and some may call it private or personal banking, but the common thread is the passion community bankers have for their communities. I certainly don't mean to imply that our large-bank counterparts don't have this passion, and there's no question about the contributions they make to communities throughout the U.S. In smaller communities, though, it is the bank that drives economic development. Community bankers often are the people who manage the Chamber of Commerce, sit on the local school board, and coach the youth athletic programs. We feel a direct link to the community we live in and have a special interest in its vitality.

Some would say that the Internet has undermined the future of community banking because it is a scale business in which we can't afford to compete. I would refute this statement. I have studied the Internet sites of all my competitors, and I believe that we are fully competitive in this delivery channel. In fact, I believe that progressive community banks may be able to leverage Internet distribution, strategic acquisitions, and alliances with other financial institutions and their local branching networks to create competitive opportunities rather than competitive threats.

Over the past two decades, the combined effect of mergers and failures has reduced the number of commercial banks in the U.S. by nearly 40%. This consolidation has been partially offset by a recurring wave of new bank charters. Over 3,000 de novo commercial banks have been chartered by state and federal banking authorities since 1980. It is commonly believed that these new banks are filling the need created by consolidation.

In March 2003, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, was a speaker at "Whither the Community Bank?"--a conference sponsored by the Federal Reserve Bank of Chicago. Two years later, his words continue to ring true: "Looking at how community banks contribute to the economy today, I would say they provide important financial services to some key sectors of the economy--services for which there are few, if any, substitutes. While they account for a relatively small share of the total banking activity in the United States, they remain highly important in some types of communities and in some parts of the country."

I believe those two sentences speak volumes about the continuing need for and the future viability of community banks in this country. Besides providing banking services in rural areas, smaller cities, and in the middle of the country, community banks also specialize in relationship banking. They make their decisions based on personal knowledge of the customer's creditworthiness and a keen understanding of business conditions in the communities they serve.

As you can see, I believe in community banking. It is who we are and what we do.