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Bob's Blog

A Response To The Question: Can Community Banks Survive?

One of my all-time favorite cartoon comic strips is Frank & Ernest.  The strip features two bums spouting earthy one-liners of wit and wisdom.  A particular favorite that I recall from way back during the Carter administration featured Ernest in a supermarket check-out line, purchasing a package of ground round.  The caption reads: "Isn't $1,645,469.83 a little steep for a pound of hamburger?!?!" (I searched Google to try and post the cartoon, but alas...).  Here's the point: during the late 1970's, people began to believe that 13% inflation was going to be with us forever, and society began to think and extrapolate accordingly.  If prices were rising, they would continue to rise.  So long as wages rose accordingly (though never by enough!), society grumbled, adapted and got on with it.  Human nature tends to make us perceive that a market cycle is linear reality.  But it’s not.
I have great respect for alternate views, but I contend that the population of community banks will fall...until it starts rising again.  Indeed, weary directors, worn-out CEOs, over-zealous regulators and the splendid brutality of our free market will winnow down the population of mono-line, non-distinguished, non-strategic banks---until the next generation of ingenuous, hungry capitalists enters the scene.
Look at the mortgage business:  the whole industry is one glorious mess.  No one knows how to pay brokers, nobody wants to hold the paper, administration is mind-numbing….it’s enough to make you want to pound your head against the sidewalk and move into Hospice care.  The 30-year fixed rate residential structure may well change…the insurance behind the note may privatize…securitization has all but vaporized…but people will still buy houses and close mortgages.  The business will evolve—and remarkably so, but it will remain a robust business.
Consider the supermarket business: gone are the mom-and -pop grocery stores.  Walmart and Target have huge, huge stores and low, low prices...but have you noticed the number of convenience food store/gasoline stations in your neighborhood?  Have you noticed how many of them sell milk, bread and cheese?  I can assure you that all of those gas-and-shops don't stock white bread and velveeta just to look "homey".
FiServ, Fidelity, Jack Henry, Harland, Diebold and a host of other huge community bank service providers are all watching the banking evolution with keen interest.  So are the auditors, law firms, IT service companies, compliance gurus, pre-paid card moguls and printers.  They all know that right now, their banking client base is only getting smaller.  Wanna bet that FiServ will soon spin out a value-priced service platform that caters to the <$500MM bank?  Do you think that maybe Jack Henry might respond?  Will they enjoy doing it?  Heck no!—but they’ll do it to support their considerable presence in the industry.  How about Diebold….'think they’ll eventually respond to new trends in the market place that will supplant those ridiculous $55,000 cash dispensing dinosaurs that community banks never could afford in the first place?  Will they want to?  Certainly not!  But do you think that Diebold would rather shut down that big plant in Canton, Ohio and send all those workers home?  I don’t.
I contend that what’s happening right now in community banking is “morbidly fascinating”.  I think it’s about time that basic concepts like Cost Accounting flush out the less productive shops in over-banked markets and provide opportunities for new models of sustainable, profitable franchises.  I think that all those community bank “organizers” who intended to be “investors”--- but never envisioned themselves as “directors” will cast around at ways to resolve their “investment” for better or worse.  The great majority of community bank directors and executive officers are solid, well-intended business people, and they'll work things out as best they can. 
My second point is this: Industries evolve only because they have to.  The community banking industry got really, really good at one thing: asset-based lending.  The industry feasted on a 15-year binge of rising commercial and residential real estate markets--especially here in the southeast (I live in metro Atlanta...we know a thing or two about asset based lending).  Asset-based lending worked fantastically well as a lending platform…until it didn’t work any more.  "Revenue diversification" is the new mantra in the marketplace not just because it’s a “salvation”--it's the new mantra because it's a healthy alternative to a single-source diet.  Rather than the analogy of a bubble popping, I see this moment as more of an enormous pendulum swing.  There will be a “next” 15-year binge.  It might be treasury services, it might be mobile banking.  It could be financial planning; it could be the trust business.  But people still need to earn a living, so the marketplace will evolve.  I, for one, am fascinated with the urgency of getting on with the evolution, because all of us know that we never commit to "change" until we have to…..and oh, brother---do we ever have to now!
My consultancy is based on the evolving model of sustainable community banking.  Please check it out at and let me know what you think.  If I can help foster an improved model for your bank, I’d be happy for the opportunity—and grateful for the business.
Oh---and the price of hamburger?  I checked at Publix this afternoon…it’s $3.69 a pound.
All the best,

3 Comments to A Response To The Question: Can Community Banks Survive?:

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Ronald Baron on Thursday, February 24, 2011 8:41 PM
HI Bob: I wanted to thank you for sharing these thoughts with us. For those of us who are not fearful of change and realize that the industry has to evolve, it's great to hear these words because sometimes it's hard to "keep the faith" when you have to deal with the huge amount of stupidity out there (and I'm not just referring to the regulatory environment either.) Thanks again. Ron Baron.
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Jeff Marsico on Tuesday, March 29, 2011 6:33 AM
Bob, Until this morning, I have never read or heard an industry expert recommend a bank install a profitability system! I applaud you for that. It is time to put pressure on unprofitable products and lines of business. Our industry needs more products delivering satisfactory profitability, and less on the dollar menu. ~ Jeff
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Arturo Marquez on Saturday, February 09, 2013 2:34 AM
Essential blog! After reading out your blog I have known that a Response To The Question Can Community Banks Survive besides I have known that community bank service providers are all watching the banking evolution with keen interest with law firms. Thanks!
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