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The Way Ahead for Community Banks

By: Bill Poquette

Kent Needham is a community banker facing the same challenges as other community bankers today — too much liquidity and too little loan demand. But these are not his only challenges. He is chairman, president, CEO and majority owner since 2007 of First Security Bank, which houses about $36 million in assets, in Overbrook, Kan., a town with less than 1,000 population. Many would say the bank is too small to be a long-term survivor in a town too small to support a full-service bank. But do not tell Needham that (or the owners of the town’s second bank, the slightly larger Kansas State).

Needham is fighting the good fight and has no intention of letting First Security Bank fade away. And not content to fight just his own battles, he also fights for his peers as a member of the American Bankers Association’s America’s Community Bankers Council and its administrative committee. He describes a goal of the council, which has about 85 members from around the country, as providing “a vision and a path for community banking as we go forward.” None of the bankers, who represent all sizes of community banks, has a “poor pitiful me” attitude, according to Needham. “Many have taken the approach of this is what we have to deal with, now what are we going to do about it?”

Like community bankers everywhere, council members are concerned and uncertain about the effects of the Dodd-Frank Act and how it might impact compliance, consolidation and size issues. “We don’t know all that Dodd-Frank brings to the table,” Needham says. “By the time it works through the regulators and is implemented, it could change in complexity and design.”

Given this environment, Needham suggests that every bank is looking for its direction and strategy. “There has been much discussion about what size bank you need to be to survive,” he says. “I think that depends on your market, the level of debt at the holding company, the expertise of the people you have, and the ability to attract and retain that expertise.” Some consider $125–$150 million to be ideal, but he believes smaller institutions will also have a place.

Needham would like to see his bank at $60–$80 million in five years. Some of that would be organic growth in a branch acquired a year ago in a larger town. Paola is slightly over 50 miles away, but with a population of about 5,000, provides significant potential for new business.

Looking toward further expansion of the bank’s footprint, Needham says that rather than buying existing branches he would probably opt for a whole-bank purchase or a merger of equals. Acquired branches, he notes, are staffed mostly by customer service representatives. With growth, a bank needs to “layer in” mid-management and expertise in compliance and IT. “So a whole-bank transaction is a little more attractive,” he says. “Hopefully you will gain some expertise that would complement the staff you have.”


Staffing can be a challenge in a small, rural bank, Needham concedes. Overbrook is 60 miles from Kansas City, with about half the commute via two-lane highway. The state capital, Topeka, is 20 miles away. And it is nearly 30 miles on mostly two-lane roads to Lawrence, home to the University of Kansas. In a community like Overbrook, bank staff members are expected to live there. “If everyone drives in to just do their job, it’s not the same,” says Needham.

Profit trends add to the challenge. Competition and the rate environment compresses margins at the same time compliance costs escalate and that is when size becomes relevant, Needham explains. It is particularly important when trying to attract quality people with skills in IT or compliance — areas where regulators are focusing more attention. “The people who have that expertise cost more money, and you see the vicious cycle we get into,” says Needham.

With 12.5 employees, Needham does not treat himself to the luxury of an executive assistant — for the first time in his career. Prior to taking over the Overbrook bank, he spent several years as president and CEO at First State Bank and Trust in Tonganoxie, Kan., a bank with 135 employees and $325 million in assets. “I’m typing my own letters; I’m doing my own spreadsheets,” he says. “I’m getting very good at Word and Excel.”

Needham has also had the good fortune in the past to have quality IT support. “When you step into a smaller organization without an IT specialist, you have a very steep learning curve.” He calls technology “an ongoing battle that requires a specialist.” For that reason, most of his bank’s IT is outsourced, including Internet banking and core processing. Currently, the internal network is peer-to-peer, but he expects an in-house server to be needed soon. That upgrade will require an extra level of security and due diligence. The bank will have to be prepared to pay the price.

First Security provides a full menu of Internet banking services but has decided it cannot cost-justify offering mobile banking. Internet banking and billpay do not pay for themselves either, Needham concedes. “They are necessary to be competitive,” he says, “but our size institution doesn’t have the volume of usage to offset the overall cost.” He hopes the volume will build, and to that end the bank is encouraging customers to use their debit cards and go online to check their balances and pay their bills.

As a community banker, Needham would like to spend more time making loans in his markets, and he has more than enough liquidity to fund them.

“We certainly want to make loans to those who can repay,” he says. “We see a lot of people who are experiencing credit problems. In many cases they have lost their jobs, and it has affected their credit. They are trying to borrow their way out of it, which isn’t good for them or the institution.”

On the other hand, those in a position to borrow do not want to, Needham suggests. “I know the administration in Washington doesn’t want to hear this, but because of the uncertainty in the economy, these people aren’t borrowing. They don’t know if they are going to see a tax increase or how much regulation and compliance are going to impact their business. Good farmers are not borrowing unless they have to for normal operating expenses.”

Needham also cites regulatory pressures as affecting his lending practice in a negative way. It used to be that when a customer was seeking a loan, maybe to start a business, the banker looked to see if the deal made sense to both the customer and the bank. “If you satisfied both of those criteria, then you made the loan,” he says. “That’s not the case today, because with every decision you now have to consider how the regulators are going to perceive and analyze it.”

As for his excess liquidity, Needham hopes he can find the right place to put it to use. To stay competitive and maintain its position in the marketplace, the bank has to pay rates on time deposits higher than what can be earned on fed funds. The alternatives to fed funds are few. Absent loan demand, “You can go to the investment portfolio, but all you do is match off what you’re paying. And you have to lengthen maturities to do that. It is a difficult rate environment,” he says. “As a result of the excess liquidity in the system, I think everyone is waiting with bated breath to see what interest rates are going to do and how the Fed will deal with the prospect of inflation.”

As he looks ahead, one of the marketing issues Needham thinks about is the different banking needs of each generation. “Younger people today don’t necessarily want to see a person,” he says. “They want ATMs, Internet banking and billpay, and they want their debit cards.” Baby boomers want the technology, but they still want to see a person occasionally to talk about something face to face. As Gen X and Gen Y mature, Needham wonders if they will transition into enjoying technology but also appreciating interaction with a live banker from time to time.

As he sees it, “retail is about convenience,” and he does not expect that will ever go away. But when someone wants to borrow money to start a business or for a career change, they will want to talk to a person with whom they can establish a comfort level, Needham believes.

While technology will no doubt continue to enhance what banks have the ability to do, there will still be a place for the relationship aspect of banking, particularly in smaller communities, according to Needham. Even in bigger cities people are going to want individual attention from someone who has expertise and knows their needs, he believes. “They may have to go across town to get it,” he says, “but for the relationship they will.” Banks may not need as many brick and mortar branches as in the past, but Needham is betting they are still going to need locations to accommodate people looking for face-to-face interaction.

The Future

Referring back to his ABA activities, Needham explains that in the wake of Dodd-Frank, the America’s Community Bankers Council is working to understand the community bank model of the future. They are trying to develop opportunities and ideas for use by community banks as they develop strategies to cope with the changes. “Some may plan to get out through a merger of equals or a sale,” he says. “Others want to acquire to expand their footprint, but they have to make sure the strategy makes sense.” There are going to be plenty of opportunities, he believes, as there are far more sellers than buyers with adequate financial resources and strong management skills.

Should opportunities arise, capital is another issue, he points out. “There are a lot of people who are not comfortable investing in a bank today because of regulations, taxes and the uncertainty about the configuration of the banking industry going forward. When they look at the risk versus reward of the investment, not too many people are excited to put their money at risk in a community bank.

“But with adequate capital, good management and a viable market, we’ll get through this,” Needham adds. “It may take a little while, and the community bank model may not be the same coming out as it was going in relative to expectations for earnings or asset growth. But there is a bright future if we keep fighting the good fight and move through the process with a positive approach.”

Bill Poquette is editor-in-chief of BankNews.

Copyright © July 2011 BankNews Media