A sense of community: a conversation with Diane Casey-Landry

In May 2004, RMA and America's Community Bankers began an alliance that would make RMA's commercial lending courses even more accessible to an association whose members--historically primarily thrift institutions--are now moving into other banking lines of business. ACB members also have the opportunity to participate in RMA's community bank audioconference series.

In this article, The RMA Journal talks with Diane Casey-Landry, president of America's Community Bankers, about the role of community banks today and the ACB/RMA alliance. Casey-Landry's 25-year career in banking began as a bank examiner for the Federal Reserve Bank of Cleveland. From there she spent 10 years as director of regulatory relations and then as executive director of Independent Community Bankers of America, then known as Independent Bankers Association of America. For five years before joining ACB as president and CEO, she was a partner at Grant Thornton, LLP, a national accounting and management consulting firm, where she also was national director of financial services.

A community's small bank merging with a larger institution has frequently set off waves of protests claiming that the larger institution would no longer maintain its focus on and participation in the community. Whether or not that's true doesn't seem to matter as much today because a new community bank often soon follows. "New community banks continue to form and do so at a fairly rapid rate," says Diane Casey-Landry, president of America's Community Bankers. New bank charters may be driven by community members who want to ensure a local bank is there to serve the needs of small businesses, such as home builders, real estate agents, auto dealers, and other providers in the community as well as the residents themselves. In a way, she says, it's as if the Chamber of Commerce makes the decision to keep an institution that has a focus on the town.

With so many institutions of all sizes looking at small business as perhaps the last frontier for profitable lending and multi-faceted relationships, though, it seems hard to believe community banks can continue to compete. Wells Fargo's Web site states, "As the leading small business financial services provider in the country, Wells Fargo is committed to supporting small businesses." Meanwhile, the opening page for Bank of America's Small Business division reads, "Get business checking with everything you need. Including a little extra time and money." Citibank has a Small-Business-at-a-Glance page listing its lineup of services. Wachovia's Web site offers small business tools and business research.

"Perhaps what's missing, though, is the customer intimacy that comes with having a bank's senior management living in the community," says Casey-Landry. "Customer intimacy is knowing that customer--not just the business. Your kids go to school together. You see the customer at the grocery store, and you volunteer together on community projects. Your loan judgments include that knowledge, so often you're able to factor that into the pricing. As large banks continue their growth merger after merger, their appetite for certain types and sizes of customer may well change, while a lender in a community bank is more apt to say, 'I live here too, and I know this town needs XYZ business.'

"Even if a large bank decides to make a drive for more customers and slashes rates, it's not necessarily doing so out of a long-term commitment to the community; often, it's a bottom-line need for a business segment," she continues. "There's nothing wrong with that, but if I were a small business owner looking to borrow, I'd be willing to pay just a little bit more to know my banker will be there, rain or shine."

ACB conducted a survey before its last annual convention to get an idea of community bankers' involvement in their hometowns--from CEO down through every level of the bank. The result, she said, was that, on average, 60% of the employees at each institution volunteered within and throughout the community--the PTA, the Economic Development Authority, the Chamber of Commerce, Habitat for Humanity, a local initiative, or some other activity. In fact, Casey-Landry says one of the challenges of her job is contacting her members because they're hardly ever in their office; rather, they are out in the community--volunteering or calling on a customer.

Many community banks also have an advantage in their quest for retail customer deposits, based in a cost structure that allows them to offer higher interest rates on checking accounts. Casey-Landry also believes community banks are getting better at soliciting business deposits related to business loans.

Paying interest on business checking accounts is one of several hot topics for Casey-Landry. While acknowledging a difference of opinion concerning this issue, she believes that "if banks have the option to pay interest for retail customers, why not do the same for businesses, particularly given that a business can open an interest-bearing cash management account at Merrill Lynch? The banking industry is short-sighted here; money is flowing out to competitors because we don't have the option to pay that interest on business checking."

Concentration in a portfolio is a natural problem for community banks, although the expertise many banks have created in their niches mitigates some of that risk. It's more a matter of managing the portfolio, Casey-Landry believes. "Just because a regulator comes into the bank and notes a concentration, the bank would want to look at the risk of that portfolio before racing off to diversify into something its bankers know nothing about," she says.

Challenges

Working with limited resources continues to challenge community banks, particularly when it comes to technology- and time-intensive issues. There used to be a fairly long lead time for adapting to change. No more, says Casey-Landry. Rapid change means continual reassessment of whether a bank has the right skills-sets in place, and then doing something about it if the skills aren't there.

Regulatory and legislative issues. Policy-maker reactions to problems brought on, in part, by the pace of change have created a regulatory burden that can be suffocating. Fraud and terrorism, and legislation surrounding suspicious activity reports, are perhaps the most significant issue. "It doesn't matter if you're a $100 million bank or $100 billion bank, you need to have the procedures in place to monitor fraud and ensure that your employees have procedures in place to follow through on any suspicious activity," says Casey-Landry. "Community bankers have been victims of Web phishing [an e-mail attempt to trick consumers into disclosing personal and/or financial information] and spoofing [a security attack that allows a fraudster to observe and modify all Web pages sent to the victim's machine and observe all information entered into forms by the victim]. And the possibility of internally generated fraud means you must be mindful of background checks on prospective employees."

With the same BSA (Bank Secrecy Act) rules applying to a seven-person community bank as to Citigroup, however, community banks feel crushed by the burden. "John Reich [vice chairman, Federal Deposit Insurance Corporation] has been leading the campaign for regulatory relief," says Casey-Landry. "As a former banker, he brings true understanding to the problem, as do Jim Gilleran [director, Office of Thrift Supervision] and Don Powell [chairman, FDIC]. When they talk about regulatory burden, it's more real to them than it is to their staff at these various agencies. Yet during the years since EGRPRA [Economic Growth and Regulatory Paperwork Reduction Act of 1996] was enacted, we've seen the Bank Secrecy Act come into play with the new Patriot Act provisions. We've seen Sarbanes-Oxley. One community bank that grew to $510 million following a merger discovered there would be a 150% increase in its audit costs. In and of itself, each new rule can be dealt with. But it's the cumulative effect that will inevitably lead to some banks saying they just can't do it anymore."

The first issue Congress is likely to address this year, Casey-Landry believes, is reform of GSEs (government-sponsored enterprises), given that both Fannie Mae and Freddie Mac have had to restate their financial statements. This could change the way banks sell loans to Fannie Mae or Freddie Mac or how they deal with the Federal Home Loan Banks. "While this may not be front and center for most community banks, it should be on their radar screen," said Casey-Landry.

Other continuing legislative issues include deposit insurance reform and bankruptcy reform legislation. It also is likely that Congress will act on legislation regarding predatory lending. "Should the President's Social Security reform proposal move forward, and I believe it will, we need to ensure that banks have a place at the table," she said.

Other regulatory issues include Basel II and public disclosure of Home Mortgage Disclosure Act pricing data. Casey-Landry is convinced that Basel II will create a bifurcated capital system for the first time in the U.S., which could have unintended consequences. "As a large bank opting into Basel II, I would be able to account for my mortgage loans at, say, 25 to 50 basis points; as a community bank, I'm still stuck at 400 basis points. That's a problem," she says. As for HMDA, most community banks have not been reporting pricing data or have been doing so on just a few loans. "We're going to have to be part of the industry's effort to look at the data in context so that it can't be misconstrued," says Casey-Landry. "I think this represents a reputation challenge for the entire industry."

Documentation requirements for loan loss reserves. One fundamental difference between bankers and accountants on the question of loan loss reserves is that accountants want to quantify everything and exclude the role of qualitative judgment, says Casey-Landry. "If a local plant has been having production problems, as a community banker I'm probably going to increase my loan loss reserves because I know something is going to happen, I just don't necessarily know what," she says. "The accountants are too focused on the numbers and don't recognize that lending is an art, not a science. So we have make-work: placing documents in files to satisfy accountants without necessarily improving transparency. I'm thinking about all the work I did at Grant Thornton on this very issue, and 10 years later I'm not sure if we're ever going to get to the point where a bank can reconcile to an accountant who is looking only at the numbers. I would argue that banks need the latitude to make loan loss reserve decisions based on both qualitative and quantitative bases, and [Federal Reserve Board] Governor Susan Bies has said that taking all judgment out of loan loss reserves diminishes the safety and soundness of the banking system."

Training. The challenges of recruiting and training are only growing. Casey-Landry says that mergers do not necessarily release talent to community banks; rather, people in more senior positions who leave are the ones who end up forming their own banks and looking for talent themselves. In addition, anecdotal evidence suggests that far fewer people are entering banking as a first career choice. So the need for training is greater than ever.

(Career tip: Today's hot commodity is compliance officers, for whom salaries have gone up "enormously," she says. In Florida, the BSA has created demand that has more than doubled salaries. People moving from the regulatory agencies to take the position of compliance officer at a bank are doing very well.)

Operational risk. When asked about the risks community banks might be underestimating, Casey-Landry first mentions the rising concern of interest rate risk, but she believes that thrift institutions have had modeling to mitigate this risk for a number of years. "I would say that operational risk, especially the technology aspect, is probably the risk that needs more attention," she says. "I received an e-mail from one of our banks about its FDIC IT exam. They were surprised to hear they hadn't placed enough focus on some aspect of procedures and operations. And this goes back to controls. Also, reputation risk needs more attention. In any disaster--and we've certainly seen a few of them lately--how quickly and correctly a bank responds can make or break its reputation. Banks must consider that different disasters can require different contingency plans." Reputation risk extends to litigation, and Casey-Landry acknowledges that community banks can be brought into litigation as easily as a large bank. "Large banks tend to be named more often than not as the defendant, but we've also seen it happen with community banks," she says.

Envision It, and It Will Profit

A community bank has an inside track on the local marketplace and is in an ideal position to take advantage of a merger situation. A community bank with vision can "beat the pants off" its large-bank competitors, says Casey-Landry. With the price of technology coming down, small banks can compete with the services and products of larger banks, yet maintain the added benefit of being able to turn on a dime, adjusting to the markets more quickly than their larger brethren.

Working more closely with RMA, ACB hopes to better educate its members about the marketplace and how they can improve their risk management practices. "To remain at the forefront, community banks need to be aware of the products on the horizon and in the marketplace and to recognize that they best way they can sell what they're doing is to focus on customer intimacy," Casey-Landry says. "RMA has a range of training and knowledge resources to help community banks thrive, and we look forward to a continuing partnership."

Contact Beverly Foster by e-mail at [email protected].

Beverly Foster is editor of The RMA Journal.

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