Recent discussion of the present and future of banking -- particularly community banking -- has too often been dogmatic.

We are told that the death of the thrift, the demise of the small, the extinction of the mutual, the rise of the megabank (in one guise or another), and the advent of niche banking are all inevitable.

In their advocacy of this fashionable ideology, many banking consultants and pundits sound more like misguided social engineers of some five-year plan for collectivizing American banking than commonsensical observers of it. By contrast, the pragmatic approach to banking begins with the application of common sense to business.

Running a successful business involves identifying market needs that the business has the resources to meet, and meeting these needs better or at a lower price, or both, than competitors do.

Bankers must also control expenses, diversify assets, and practice the right banking style. Successful community bankers accomplish these tasks, and they do so in a variety of ways that constantly confound dogmatic notions of what banking must be or become.

Powerful Resources

The resources of the community bank are limited but powerful in the hands of capable bankers. Chief among these resources is the bank's superior knowledge of a community. It can use this knowledge to deliver products and services tailored to its customers in a personalized, unbureaucratic manner.

As well as its customers, a community bank's shareholders (unless the bank is a mutual), employees, and regulators also are stakeholders. Moreover, customers, shareholders, and employees are overlapping stakeholders whose needs and expectations are shaped by this blending of interests.

The customers are individuals and small businesses. Their needs are small deposit and loan services -- the staples of a community bank. The bank may also provide investment services for individuals if the community has sufficient personal wealth to warrant such services.

Shareholder Loyalty

Shareholders are bank customers who expect a return on their investment consistent with the bank's service to the community. They will tend to be more loyal than the nonresident shareholders of a larger bank, but a community bank can quickly exhaust this loyalty if it provides lackluster financial performance and customer service.

Employees will also be customers -- and often shareholders -- of the bank. Their needs include competitive pay and the pride that comes from working for a highly regarded, locally owned and managed community bank.

Regulators will have three basic expectations of the bank: good capital, prudent and capable management, and service to the community, including a committed compliance with the Community Reinvestment Act.

Because regulators are averse to risk, there will be manageable -- though not always palatable -- tradeoffs in satisfying them as opposed to other stakeholders.

Three Challenges

If community banking presents savvy businessmen and businesswomen with worthwhile opportunities, it also carries with it the burden of three challenges: expense control, asset diversification, and banking style. While these challenges are not unique to community banking, meeting them effectively makes special demands of the community banker.

Expense control doesn't mean minimizing expenses, because such important selling points as customer service can suffer from a single-minded focus on expense reduction. Rather, expense control means managing expenses. The community banker must carefully weigh the tradeoffs of spending more or less, and for what purposes.

The resource constraints on a smaller bank require the community banker to decide with some precision what must be accomplished internally and what may be accomplished externally in a more cost-effective manner through outsourcing to consultants and other providers.

Because regulators may not appreciate or willingly acknowledge the value of some outsourcing by the community bank, the community banker must be prepared to persuade examiners of its prudence.

Asset Diversification

As all community bankers know, more probing examinations are but one aspect of a growing regulatory burden. which weighs most heavily on community banks.

Asset diversification is the second challenge to the community banker. Because the community bank serves a local market area, geographical diversification of its loan portfolio will be difficult, if not impossible, to achieve.

The industry's recent experience is an object lesson in the twin risks of lending too freely close to home and seeking to avoid this risk by purchasing loan participations outside the local market area.

Achieving asset diversification requires two realizations by the community banker. First, loans large in relation to capital are always high-risk and must be regarded as a carefully controlled sideline, not a core business.

Second, the securities portfolio is an important tool for diversifying risk even when creditworthy loan demand is plentiful.

Properly understood, the community bank's securities portfolio is not just a place to put funds when loan demand is weak -- it's a place where the bank must invest funds even in the presence of strong loan demand.

Banking Style

Finding and practicing the right banking style is the third challenge to the community banker. Even though most community banks are stock institutions, many will have begun life as mutual savings banks or associations, and all community banks will find it useful to remember these roots.

The challenge for the community bank is to enhance future performance and shareholder value while preserving the personal touch.

Every community bank, no matter how small, will have a highly articulated corporate structure in which authority is both shared and delegated.

The board of directors must give management a clear mandate and sufficient leeway to run the bank. But management must appreciate that in a community bank, the directors will be more involved than would be the absentee directors of a larger institution.

The officers and directors of the community bank must find ways of respecting each other's role while taking an active interest in what each is doing to secure the success of the bank.

Directors' Role

No less than the officers, the directors of a community bank have a crucial role to play in marketing the bank to businesspeople in the community.

The community banker thus needs to be both a fiduciary and a businessperson with a face and a first name who is capable of satisfying the expectations of customers, shareholders, and employees.

To do this, the community banker must be informed about and involved in the community. He or she must understand that a business plan is merely a memorandum of current thinking that needs to be kept current.

The community banker must regard regulators not as enemies but as part of the bank's control environment, like its audit committee and public accountant.

The community banker should try to work constructively with regulators to run the bank better, because the only alternative is fruitless confrontation.

Finally, the community banker must remember that a community bank consists of many community bankers. Not only the officers of the bank, but also its directors, employees, and shareholders are vital emissaries to the community upon whom the bank's success depends.

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