Time to Reinvent Community Banking? Challenges and Frustrations Have Industry Assessing the Basics. Most Rule out Wholesale Change, but Many See More Than Tweaking Necessary

[ILLUSTRATION OMITTED] Steve Goodenow, president and CEO of $613.7 million-assets Bank Midwest, is concerned about the future of his bank and his part of the industry. He knows a college professor who teaches banking schools. He confided in the professor recently: I've been asking our vendors what they are working on, in terms of features that will appeal to our future customers. The professor told him he was right to be concerned. He'd recently asked students to raise their hands if they banked with a community bank. Few arms were raised. Why so few fans? The professor said the young people were all about mobile banking apps. you didn't have that, you weren't in their world. How do you engage Gen Y? says Goode now, whose bank serves rural areas of Iowa and Minnesota. We don't have an answer yet. He points to the PNC Virtual Wallet and shakes his head. electronic product is a combination of transaction account, short-term savings, and high-yield long-term savings, along with many personal convenience features--with a special version for students. We can't deliver anything as cool as PNC and some of the others do, says Goodenow, whose family-owned Bank Midwest is a progressive institution with its eye on trends. Even the typical farm borrower has evolved, he notes. are much more sophisticated. They are university educated, not scared of technology. They are more remote; they don't live in town and they don't drive by the bank every day. Goodenow is a young banker and has decades in the business ahead of him, he hopes. However, at the end of the day, money is a commodity, he says. And the end of the day, information is of value. His bank and many other community banks need to find a way to continue to be relevant. What Goodenow speaks of should be challenge enough, but the reality is that community banks must adapt to such ground-shifting cultural and technological changes in the face of vastly increased government regulation and intervention. This is a marathon, it isn't a sprint, says Robert Jones, president and CEO, United Bank, Atmore, Ala., $481.6 million-assets. Everybody's got to be engaged. Assessing the headwinds The list of challenges facing community banks daunts the most optimistic players times. Take Earl McVicker, a longtime investor in community banks and chairman and CEO of $222.9 million-assets Central Bank and Trust Co., Hutchinson, Kan. He categorizes the headwinds this way: government-owned competition; government-supported competition; and government-endorsed competition. The players include tax-advantaged credit unions; the Farm Credit System; and megabanks that he still sees as too big to fail (while he himself feels too small to save). Yet that's only part of the government challenge. We seem to be headed towards one-size-fits-all regulation, and that couldn't happen a worse time, says Arthur Johnson, chairman and CEO of $426.3 million-assets United Bank of Michigan, Grand Rapids. If we've learned anything from this crisis, it is that everyone doing the same things is not the way to go. We're afraid of size, but everything we are doing is making banking bigger in every size category, and that's trouble. Continuing his point, Johnson says he would hate to see everybody running out and trying to find a merger partner in the belief that bulking up will solve their problems. Yet the litany of operational challenges, on top of those regulatory and competitive challenges already listed, will send many to their medication of choice. Johnson ticks them off: pressure on revenues, both fee income and interest income; capital standards that will make it necessary to get by on less leverage; demands for more capital a time when it can be hard for many to come by any, and when the appeal to invest in banking has paled for many potential players; and compliance costs spreading and growing like spilled red ink. …