I recently spent three hours with the board of a progressive community bank. I have met with boards before, and I do not feel that my visits are seminal events for most directors.
But I remember one mutual that was wondering whether it should go public. I thought I had convinced the directors that with their goals, the attractiveness of present salaries and benefits, and the solid esprit de corps of the bank, they would be making a mistake to give all that up and center attention largely on profits, which a stockholder-owned institution is forced to do.
I felt I had done my job well. That is, until two weeks later, when the bank announced it was going public. Evidently the bank was using my visit to show that it had done its due diligence. To fend off any lawsuits for negligence, it could claim, "We hired Dr. Nadler of Rutgers, who told us we should go public."
This more recent case was different, however. The bank had significant stature in the community and a strong mission to serve all the people in the region.
The question to be discussed during my visit with the board was this: What future, if any, can a community bank with assets of about $670 million have in today's world?
You could sense the worry in the comment of one director whose clothing store had failed after many years. "People started going to bigger and bigger stores," the merchant said. "And only when we closed did they come and say, 'Where can I get personal service anymore?'" To which I answered, 'When were you in to get this service in the past four years?'"
Growth is always a favorite goal. And most people like growth, following the philosophy of the farmer who says, "All I want is my land-and the land next to it."
But small size is not what kills banks. The small clothing store has less inventory and charges higher prices than larger stores, in most cases. But the small bank can still offer most of the services the large one can- at least the services that most people want. And if a loan is too big, the bank can farm out pieces of it. Similarly, we have no evidence of economies of scale whose lack could make or break a bank.
Two things that have hurt the smaller banks in America are atrophying communities and banks making injudicious loans. And when a bank makes growth a goal without having a demand for more credit or deposit services, it is likely to reach for business and take risks it would not take if it were satisfied with its size.
We have seen many banks and thrifts get into trouble because new capital burned holes in their pockets. And we have seen many companies in other industries-from retailing to air travel-expand themselves into bankruptcy because they were motivated by ego instead of by trying to meet an economic need.
There are certainly advantages to growth. There is a feeling of exhilaration for the bank and the opportunity for promotions and higher salaries for the workers. Larger banks can also make larger loans, which means fewer loans have to be farmed out.
But people who use community banks do not switch because one has a larger footing than another. They want quality service, personal attention, and, as Christopher Parker of Ryan, Beck & Co. stated in a recent article in the firm's Weekly Review, banks that do not irritate them with service charges for routine transactions.
So I left this board impressed by the fact that it constantly reevaluates its goals, services, and strong public-service mission.
I hope I was useful in helping it maintain focus on where its efforts should be directed. But mostly, I hope I helped it realize that growth by itself, without customer need, is not a worthwhile goal.
