When you tell people you're writing about how community banks must change to survive, you get some version of this reply: "I can't wait to read it."
It seems everyone in community banking knows the model needs to evolve, but few have any great ideas on how to do it.
Experts suggest the full spectrum, from beefing up the traditional model to stripping it down. But there is no right answer. It will vary from bank to bank, depending on its market, its customers, its competitors and its managers and owners.
But one thing does seem certain: standing still is not an option.
"The fact that the number of community banks is declining is not an accident. The viability of the model is in question," said Steve Ashman, the chairman of Capital Bank in Rockville, Md.
The $260 million-asset bank aggressively manages its margins and costs; it stopped opening new branches five years ago and just last week bought its first failed bank from the FDIC.
"Maybe the single biggest thing is not to assume that what made you successful 10 years ago will work today," Ashman said. "Every day I question how is the world changing and how is that going to affect my business."
Finding ways to shore up fee income sounds good, but as Ashman sees it, "The only way for a community bank to make money is to lend money."
A lot of people agree with him, but then they note that the competition for strong borrowers is fierce and that the staple of community bank portfolios — commercial real estate — continues to be kryptonite to examiners.
Still, some bankers are finding ways to boost lending with some combination of finding new niches, buying business lines and hiring experienced underwriters.
Among the niches: lending to doctors and lawyers, restaurateurs, truckers, homeowners associations, even exterminators.
"There are a lot of niches out there," said L.T. "Tom" Hall, CEO of Resurgent Performance Inc., a consulting firm in Alpharetta, Ga. "You learn the business, learn the collateral, and then go for it. You add value by being a specialist."
That's the tack Brad Swickey, president and CEO of Valliance Bank in Oklahoma City, took.
Valliance needed to find an alternative to commercial real estate lending because, Swickey concedes, the $210 million-asset bank was "way over" the federal regulators' concentration guidelines, particularly in residential construction loans. So he hired a team of health care lenders who finance everything from young dentists acquiring their first practices or older doctors who need to buy high-tech equipment.
"It was a result of government regulation that I have had to change my mode of operation and am doing well as a result," Swickey said in an interview. "But I'd still rather be making real estate loans."
Valliance set a goal of making $61 million in new loans this year. Swickey figures he will hit that mark in October and finish the year with $80 million or more new gross loans.
First Citizens Bank of Georgia in Dawsonville picked the student loan business as one of its new niches because so many lenders have fled the market and government financing is tight.
"We are looking to diversify our portfolio," said Will Wade, the $112 million-asset bank's senior vice president for retail banking administration. "We also saw there is a need in our community."
First Citizens hasn't funded a student loan yet but has some in the pipeline and is hosting a seminar on education finance to spread the word. Wade said the bank analyzed the niche for a year and brought its regulators in about halfway through the process to make sure they wouldn't object.
First Citizens is also pursuing something Wade called agritourism. Imagine pumpkin growers ginning up revenues by inviting the public to pick their own jack-o'-lanterns or farmers charging admission to folks who want to wind their way through mazes cut into cornfields.
"Companies are having to retool, and so are we," Wade said.
What First Citizens saw in student lending, Main Street Bank in Bingham Farms, Mich., saw in residential lending, and in particular jumbo mortgages. "The demand is there, and there are a lot fewer players," said Jeff Kopelman, Main Street's CEO.
"What I would like to see happen would be for the economy to turn around the real estate market to turn around and we go back to where we were, but that's not going to happen," he said. "We have to find different ways and new ways to get things done."
The $90 million-asset bank bought a residential lending operation from a competitor that has since failed. Kopelman worked at that bank years earlier and knew the people in the residential mortgage unit. Main Street did $10 million in residential mortgages last month, Kopelman said. "We bought a very experienced operation," he said. "It's quite profitable and doing very well."
Main Street is keeping some of the jumbo mortgages on its books as a replacement for commercial real estate credits. The bank also is looking beyond traditional forms of collateral to secure loans like marketable securities. "You just can't operate like you used to," Kopelman said.
Tony Feraro, the CEO of Concord Bank in St. Louis, agrees.
"What I see happening is a lot of the banks are starting to hire again commercial and residential real estate people," he said. "They truly believe that within a year or two this market is going to be wonderful. It's really scary."
Many bankers, he said, are missing the bigger picture.
"Loan demand is there. It's lack of underwriting expertise that is the problem," he said. "You have to reduce your staff, clean house by 50% and rehire."
Concord is looking to veteran lenders who know how to underwrite more than commercial real estate loans. "It's the old-timers who retired who were the true bankers, who knew the area, who knew diversification and these guys want to come back to work," Feraro said.
The $145 million-asset Concord has closed $27 million in new loans over the past six months, Feraro said. "And we have another $10 million waiting in the backlog. The loan demand is phenomenal."
Concord is focusing on lines of credit for export and import businesses and financing various types of receivables. The bank is making money again after losing $1.9 million last year.
"Believe it or not, there are lots of businesses that have either have thrived or continue to do well or are just on the brink of turning, but no one will give them a break," Feraro said. "We have to take a risk to make a reward."
To be sure, there is an element of risk in any change.
But the community banks that resist change run the risk of being swept up in the massive consolidation wave so many are predicting.
Barb Rehm is American Banker's editor at large. She welcomes feedback to her column at
