ICBA Industry Report Card—2014: Navigating the Post-Recessionary Road

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Leveraging strengths of creativity and top-notch customer service, community banks look to grow their balance sheets in 2014

By Jake Anderson

“We’re on a mission,” says Bill Trezza, CEO of $496 million-asset Bank of Agriculture & Commerce in Stockton, Calif. The community bank’s goal is to lure business away from massive, national players amid a competitive loan environment in which institutions of all sizes are “fighting over the same bone.”

Trezza, whose community bank has 10 branches in north-central California, recently targeted a local community that had a “vacancy of face-to-face banking,” and in which his bank’s owner had cultivated a personal network of business leaders. Bank of Agriculture & Commerce solicited those leaders’ business, marketing the hands-on approach it brings to the table, and ultimately originated “$5 million to $10 million in loans in the last six months,” Trezza says, including some from customers disgruntled by their dealings with a large California bank. “We’re working harder to convert people to our brand of banking,” he explains.

That “brand”—characterized by a tailored, creative and relationship-based approach—remains the sharpest arrow in many community banks’ quivers, according to the latest ICBA Industry Report Card survey of roughly 200 community banks nationwide that was conducted in October. And they are navigating the post-recessionary period with growing confidence, despite massive headwinds, including mounting regulatory burdens, a protracted low interest-rate environment and pressure to adopt new technologies amid evolving customer demands.

Signs of strength

Nearly three-quarters of survey respondents’ profits increased or held steady in 2013—with an impressive 17 percent climbing by at least one-fifth.

Organic loan growth, including an uptick in Small Business Administration lending, coupled with additional income from selling SBA loans, bolstered the bottom line at State Bank Northwest, says Lorilei Bruggink, the bank’s executive vice president and chief operating officer. In late 2013, her $105 million-asset community bank in Spokane, Wash., which operates three branches in eastern Washington state, was expecting profits to climb more than 50 percent to roughly $800,000 for the calendar year.

Like State Bank Northwest, many community banks are counting on business lending to fuel growth: A whopping 87 percent of the ICBA survey respondents expect commercial loans to be their biggest profit drivers among all revenue streams. While consumer confidence remains shaken, and individuals focus on lowering personal debt, business borrowers “are getting healthier,” and they need capital to grow, says Bruggink, whose community bank recently hired an SBA expert to further bolster its commercial loan portfolio in the coming year.

Keeping the “Community” in Community Bank

Community banks are, of course, spreading the word about the value and offerings they bring to the table. In fact, more than a third of community bankers who responded to this year’s ICBA Industry Report Card survey plan to increase marketing budgets in 2014, while about half will maintain 2013 levels.

But most community bankers acknowledge that there is ample opportunity to refine strategies. The vast majority say they don’t currently use customers’ demographic or behavioral data to make targeted offers. (About half say they want to but lack the implementation know-how.)

Industry consultant Anita Gentle Newcomb, president of AG Newcomb & Co. in Columbia, Md., suggests that community banks start by fully using systems that create and track “master customer information files,” which many banks already have and that allow them to break customer data into segments. Appending those customer files with demographic software will allow further segmentation of their customer base to learn what certain customer categories typically seek in a banking relationship.

Meanwhile, slightly more than half of the ICBA Industry Report Card survey respondents do not have a strategic plan for adding younger customers, and that could soon pose a problem.

Community banks often point out that young people tend to be less profitable customers, “but when you think about profitability, you have to think about it over the life of that relationship,” says Newcomb, and studies indicate that this younger generation is establishing their long-term banking relationships around the time they head to college.

Meanwhile, social media is an important—and free—tool for opening a line of communication with young people. About 40 percent of respondents have a social media strategy, and Facebook is the most common channel.

State Bank Northwest in Spokane, Wash., uses Facebook to promote its events and community outreach. When a local home burned down, New Horizon Bank in Powhatan, Va., used Facebook to publicize an account accepting donations for the displaced family.
But experts say social media offers broader opportunities. Asking for feedback about a new application you’re rolling out, for example, is a way to establish relationships with younger generations and learn which products and services those customers desire, says Newcomb. And customers often provide free advertising by sharing their positive experiences.

About 17 percent of the ICBA survey respondents say customers most frequently compliment their community bank’s community involvement, and it’s not difficult to see why. Three in five community banks were involved in at least 10 community events during the past year, and every survey respondent was involved in at least two during that period. Nearly half, meanwhile, offer financial literacy programs to their customers.

“When you are in a community, you have an obligation to give something back,” says Lorilei Bruggink, State Bank Northwest’s executive vice president and chief operating officer. “It creates a lot of goodwill,” but “you definitely get a return.” For example, the bank doled out $111 to pumpkin-carving contest winners during its recent 111th anniversary celebration, and many recipients quickly opened accounts to deposit the cash.

Sharpening Staff Skills and Running a Tight Ship
Similar to last year’s Industry Report Card survey, many community banks that responded to the latest survey say boosting efficiency remains a key focus, and nearly two-thirds plan to accomplish it in 2014 by investing in training staff. Much of the need for increased training is a function of the complex regulatory environment.

“We’re trying to contain personal costs we have to incur in the future … by having, at the lower levels, a more talented person who can multitask and not be so specialized,” says Bill Trezza, CEO of Bank of Agriculture & Commerce in Stockton, Calif. In other words, trading three entry-level workers for two with deeper skill sets. The $496 million-asset community bank is also designating staff at certain branches as universal topic-area experts, to field questions when customer service is overloaded.

Another imperative for the community bank is identifying the next generation of leaders, but “we think the hiring criteria we’ve used in the past isn’t going to work with youth,” says Trezza.

Staying on top of technology should help as community banks try to make inroads in this area, and many appear to be making that a priority: 35 percent of the ICBA survey’s respondents plan to boost in-house technology in order to improve efficiency; one-third plan to outsource more technology; and nearly 40 percent are looking to trim headcounts.

Small Business Success

About 73 percent of the community banks that responded to ICBA’s latest Industry Report Card survey lent to at least 20 small businesses during the latest fiscal year, and 80 percent helped start at least one small business during that period.

“The economy has been waffling over 2013, but there’s been some improvement,” says Kathy Grasty, chief financial officer for New Horizon Bank, a $50 million-asset community bank in Powhatan, Va. That translates to a need for more financing.

There are many tools in community banks’ toolboxes for servicing small-business clients, and flexible underwriting systems remain essential. While big banks may impose strict terms that preclude small businesses from loan eligibility, “general flexibility in helping businesses out and doing what makes sense” is helping New Horizon Bank grow its small-business client base, Grasty says. For example, if there’s some weakness in a business client because of the economy, she explains, and a Small Business Administration guarantee can shore up that credit, then the bank will take the SBA loan option.

Small businesses also present an attractive opportunity during a period when job cuts persist at large employers, and economic uncertainty is hampering consumer confidence. “Small businesses will be what brings us out of the slump in the economy,” says Grasty, whose community bank was founded in 2009 and swung to profitability in 2013.

What community banks really want to find is borrowers who can demonstrate their ability to grow over time, making them valuable long-term partners. State Bank Northwest in Spokane, Wash., has gone so far as to help entrepreneurs compose their initial business plans—a big benefit for the startups, but one that also sets the stage for a symbiotic relationship, according to Lorilei Bruggink, the community bank’s executive vice president and chief operating officer.

Of course, there’s ample evidence that community banks are already tapped into the small-business market: While they account for roughly 14 percent of the country’s total banking assets, community banks are responsible for 46 percent of all small business and farm loans, according to the Small Business Administration.

Foot Traffic Falls

Despite higher profits in 2013, many community banks are witnessing a decline in foot traffic at branches. More than half of survey respondents lost traffic in the past three years, and less than a quarter have seen an uptick.

Jim Eckert, president of Anchor State Bank in Anchor, Ill., estimates that traffic to Anchor’s sole branch slid 10 percent in 2013, and he attributes the decline largely to a demographic shift. “Part of it is that our customer base is getting older,” he says, adding that younger people are increasingly turning to ATMs, whereas his older customers are more inclined to use checks or visit the branch. Additionally, the makeup of Anchor, Ill., his rural town of 150, is itself skewing older, as younger generations leave for college and in search of higher-paying jobs.

Remote capture has played a major role in falling traffic at Bank of Agriculture & Commerce in Stockton, Calif., says CEO Bill Trezza. He sees waning foot traffic as an opportunity to downsize branch footprints and to find new locations that can share a wall with other tenants. For example, his community bank moved one of its more isolated branches into a new mall, planting it next to a Starbucks outlet. The move shaved off about 1,000 square feet of space, and the coffee shop neighbor helps attract foot traffic.

ICBA Senior Executive Vice President and Chief of Staff Terry Jorde agrees that proliferation of transaction tools—ATMs, mobile banking, etc.—have reduced the need to visit a bank on a regular basis, save for exceptions like small businesses, which still often require face-to-face interactions with loan officers.

She says, however, that the shift presents an opportunity for community banks to reallocate funds to new technologies that expand their reach: “They’re not just destined to have customers within a 10-mile footprint of their brick-and-mortar location.”

Jorde stresses that the transition away from physical branches does not dilute the importance of relationships, which have long been a distinguishing factor for community banks—it merely gives customers more avenues by which to communicate with their trusted hometown bankers.

State Bank Northwest is not alone: Roughly two in three community banks that ICBA surveyed say loan volume grew in 2013, and 11 percent of respondents said it held steady. That marks an improvement from 2012, when loan volume increased for 46.5 percent and remained flat for 21 percent. Furthermore, 84 percent of respondents to the latest survey cited “organic loan origination” as most likely to fuel growth in the coming three years.

Meanwhile, consumers’ increased focus on savings has boosted deposits, and having more cash on hand helps banks like State Bank Northwest meet growing loan demand without borrowing funds. In fact, four in five of the ICBA survey respondents say liquid assets grew or stayed flat during the past three years—with a third reporting growth of more than 20 percent. As liquid assets grew at Bank of Agriculture & Commerce, “the first thing we did was expand our muni portfolio,” says Trezza, pointing out that effective municipal bond yields are higher than yields from some other investment options.

Industry experts say 2013 profit increases are also a function of community banks reducing loan-loss provisions, as delinquent loans, nonperforming assets and net charge-offs decline.

Overcoming obstacles

Myriad challenges persist, but opportunities abound as well. Community banks continue to grapple with rock-bottom interest rates that diminish margins and mounting regulations that demand major monetary and human capital investments. Nearly two in five community banks say increasing loan margins or profit earnings presents their greatest challenge in 2014.

“I’ve never seen a time when interest rates were near zero for year after year after year,” says Terry Jorde, ICBA senior executive vice president and chief of staff. Margin compression and low yields on loans mean community banks must get creative, often by identifying new sources of noninterest income.

Roughly half of community banks say overdraft fees constitute their most profitable non-depository and non-lending product—but most are focused on improving overall efficiency and cutting overhead costs to boost earnings. Many are considering increasing their service prices, and some are adding new revenue streams altogether.

For example, ICBA is seeing more community banks enter the credit and debit card business, or increase their focus on those offerings. Other community banks are moving to diversify income sources by adding services like insurance or wealth management, and still others are selling SBA loans they originate. “There are a lot of opportunities for banks to become the financial services provider, from cradle to grave,” says Jorde, who was a community banker for more than three decades before joining ICBA’s staff.

The onslaught of new regulations from Washington, meanwhile, continues to add expenses for community banks, and 27 percent of respondents to ICBA’s survey say preparing for or complying with regulations is their greatest concern for 2014. In ICBA’s industry survey for 2013, community banks also ranked regulatory burden as their top concern, with 37 percent citing it as the biggest challenge heading into that year. Increasing loan margins and earnings ranked as the second biggest challenge for community banks, listed as the top concern by 30 percent of last year’s respondents.

Meanwhile, the majority of community banks plan to increase their spending on staff, outside consultation and technology in 2014 to meet their compliance needs. Jim Eckert, president of $16 million-asset, single-branch Anchor State Bank in rural Anchor, Ill., says constant reiterations of complex mortgage rules implemented last year led him to exit one business and focus on another, more profitable one.

“I am the compliance department, and I can’t keep up with it,” Eckert says. “Consequently, we’ve discontinued doing residential real estate mortgages” to focus on agricultural lending, which has long been his bank’s bread and butter.

Compliance is such a huge expense for Anchor that Eckert, who is nearing retirement, is considering a suitor for his community bank. He says he doesn’t want to sell, but because of compliance costs, he isn’t sure he’ll be able to find an affordable, qualified successor. About 15 percent of Anchor State Bank’s revenue is now spent on compliance, which ate up roughly 7 percent a few years ago. And the bank’s experience is not unusual.

Almost half of community banks say they spend at least 10 percent of their annual revenues on compliance, and a sobering 19 percent spend at least $1 on regulatory matters of every $5 they take in. That’s a similarly sized piece of the pie that respondents allocated to compliance the prior year.

Bank of Agriculture & Commerce recently hired a professional enterprise risk management officer—a six-figure addition to the payroll—to oversee compliance. The ongoing documentation required to demonstrate the bank’s compliance is particularly onerous, Trezza says.

While frustrated, community bankers are not fearful. They have vocalized frustrations with Washington’s one-size-fits-all regulatory approach, and industry experts seem optimistic that progress led by ICBA toward imposing further tiered regulatory rules that accommodate the particular business models of community banks are paying off. For example, Jorde cited a recent speech by Conference of State Bank Supervisors CEO John Ryan, in which he called for regulatory reform that better differentiates between community banks and Wall Street giants.

“When the regulators step forward and publicly state that, ‘We’re overdoing this,’ everyone, including Congress, takes notice, and I think we’re making traction,” says Jorde.

Long-term relationships and added value

Three-quarters of community banks report that “exceptional customer service” is the compliment they still receive most from customers.

Just ask Gordy King, president and chief operating officer of $207 million-asset InvestorsBank, which targets business clients with debt needs of up to about $5 million. The community bank in Waukesha, Wis., can’t always compete on price when going head to head with industry giants—but efficiency, flexibility and accessibility help it thrive.

As one of InvestorsBank’s largest commercial clients grew and required an increasing amount of debt, it began shopping around at bigger banks. But InvestorsBank sent King, its CEO, and its other senior executives to present—in person—a solution in which the community bank would partner with another community bank that could supplement its services. “They said InvestorsBank was too small for them, but we said, ‘Here’s our solution, and as a matter of fact, it’s going to save you money,’” he recalls, adding that the client was pleased and ultimately chose the community bank’s financing solution.

The accessibility of its seasoned leadership team is key to InvestorsBank winning and retaining clients. When negotiating financing deals, huge banks may send more junior staff, who must consult with a committee before making formal offers. “From a community bank perspective, what can really win for us today is velocity back to the customer with your best deal,” says King. “You’ve got to get in first, give them the best deal and don’t let them talk with another bank.”

Community banks are also leveraging their status as trusted advisors. In 2013, survey respondents, on average, worked with 18 struggling customers in an attempt to help them avoid default, and two-thirds of those attempts proved successful.

One of InvestorsBank’s clients, a family business operating in the service industry, took on too many unprofitable jobs and fell behind on contracts. The community bank brought in a consultant to help the customer cut expenses, eliminate unprofitable jobs and raise margins. Fourteen months later, the customer has righted the ship, paid down debts, and is a few months from paying off his loan.

But competition for new business remains fierce, and InvestorsBank is focused on a “boots-on-the-ground” strategy. “You need to have people out calling, calling, calling” on prospective clients and strengthening relationships with existing ones, says King.
Jorde agrees, adding that lending to small businesses is, and has always been, an excellent opportunity for community banks. “It’s a really good time to remind your community that you’re a small business just like they are, and you can offer all of the same products and services that the big banks can, only you can do it with much better personal service.”

And further differentiation is key, as nearly every community bank claims that customer service is what sets it apart, suggests Anita Gentle Newcomb, who spent more than two decades in the financial services industry and is now president of AG Newcomb & Co., a community bank strategic advisory firm in Columbia, Md. While “there’s no silver bullet” that works for every community bank, the trick is to identify the unique value each brings to the table and ensure that everything in the organization—from technology to the in-branch experience—“reinforces and optimizes that value proposition.”

Bringing the bank to them

As baby boomers age, attracting younger generations, particularly tech-savvy millennials, is increasingly important.

While more than 90 percent of community banks say their average customer is between the ages of 41 and 60, about one-fifth cite an uptick in the number of their customers in the 31-to-40 age group, and 14 percent are seeing more clients between 18 and 30.
Whereas earlier generations were content with waiting a week to cash a paycheck at their local branch, millennials value immediacy, observes King. About 57 percent of ICBA survey respondents offer mobile banking, allowing customers to conduct transactions through a mobile device or browser, while another 23 percent offer mobile payments—so clients can use mobile devices to buy things at the point of sale. About two in five banks, however, have not adopted either technology—and that may prove disadvantageous for those institutions, as experts agree that members of all generations now expect banks to offer those services. Unlike the generations before them, millennials are beginning their banking relationships via mobile, Newcomb says.
Consequently, mobile is expanding the reach of more community banks. “It brings the bank to our customers,” explains State Bank Northwest’s Bruggink. Previously, her community bank lost some commercial clients that moved from Spokane to Seattle, about 200 miles away. Now, it retains such customers, largely because of remote deposit capture service; the bank currently offers non-mobile remote deposit but has a request for proposals out for adding mobile and plans to implement that functionality in 2014. She says that following an initial investment in the technology, ongoing expenses are minimal, and “the returns outweigh the cost.”

Indeed, tech investments are rising across the board. Three-quarters of the ICBA survey respondents plan to increase technology expenditures this year, nearly one in four will maintain 2013 levels, and a mere 2 percent will reduce spending.

“Technology’s one key to provide great service, but it’s expensive,” says King. “Small banks like us can’t be leaders in technology, but we can be fast followers. I can’t afford to design a new Web program for check processing, but when it happens we need to embrace it.”

But Eckert says Anchor State Bank, like other community banks, can’t always afford to offer mobile or online banking services right away. “Everybody wants you to offer all the services of big banks, but nobody wants to pay for it. We can only afford a certain amount of loss leaders,” he says.

Nevertheless, many community banks are cultivating customer relationships as early as possible. For example, New Horizon Bank in Powhatan, Va., offers children’s accounts that feature higher interest rates, and it added a special teller window for kids, where it doles out “bonus bucks” in addition to the requisite lollipops, says Chief Financial Officer Kathy Grasty.

And while past efforts to capture younger customers often hit a road bump when students left for college, mobile banking is turning the tide for the $50 million-asset community bank: “If we can get them as a high school student, when they go off to college with a checking account, they won’t need to change banks,” explains Grasty.
But it’s also incumbent upon community banks to convey to younger generations the added benefits they bring to the table. “If the value is explained to them, and they receive that value, they’ll make that selection,” says Jorde.


Jake Anderson is a writer in Minnesota.

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