Innovation Engineers


Kansas and Florida community banks offer in-house handiwork to others

By Elizabeth Judd

From customized lending to extraordinary customer service and convenient payments and technology, community banks have been creatively innovating and solving problems for their customers for as long as our country has existed. More recently some have started outsourcing their homegrown ideas and innovations to other community banks.

That’s the case for the $45 million-asset Swedish-American State Bank, a single-office community bank in Courtland, Kan., as well as the $2.4 billion-asset CenterState Bank, a 59-branch community bank headquartered in Winter Haven, Fla. Both community banks are demonstrating how innovation and creativity continue to thrive throughout the industry.

When Tanner Johnson, vice president and marketing officer for Swedish-American State Bank, devised an automated solution for simplifying the reporting of advertising activities under Regulation DD compliance, he saw no reason that the technology shouldn’t be made available to other community banks. The same is true for CenterState Bank, which recently leveraged its in-house loan-hedging infrastructure to offer other community banks the ability to safely change longer-term fixed-rate loans into floating instruments.

“Good ideas can come from anywhere,” says CenterState Bank’s Chief Strategy Officer Chris Nichols. He believes that community banks can spread the costs of innovation by offering their own in-house-developed innovations to other community banks facing similar regulatory requirements or dilemmas of their own.

Easing regulatory burden

When Johnson joined Swedish-American State Bank, a community bank formerly owned by his great-grandfather, he had already founded a Web development company with a friend. He says he was “wired to look for ways that technology can help us in our daily tasks.”

“Our first Reg. DD exam was an eye-opening experience,” Johnson recalls. He was surprised at the volume of documentation required by the regulation, which mandates that banks retain copies of print advertisements, Web page updates and marketing emails for two years.

After several weeks of Johnson writing his own code, the result has been, a new Web-based service that archives documents for banks from their websites, print ads, promotional emails and consumer disclosures. Community banks will soon be able to buy subscriptions and be given a user name and password for the system.

The system allows banks to use smartphones to take photos of ads and then upload the ads directly to the archiving service. Moreover, by including the website’s Internet address on their mailing lists, banks can automatically add all promotional emails to their archives.

“Our first Reg. DD exam was an eye-opening experience.”
—Tanner Johnson, Swedish-American State Bank

Johnson notes that keeping track of changes to a Web page is especially onerous. If a community bank reverts to a former Web page to capture an image, that page is published onto the live site and visitors could possibly view out-of-date rates and other information. With, a third-party app visits the bank’s website every six hours and takes a screenshot whenever anything has changed.

“It’s a slicker way of doing things,” Johnson says.

For Johnson, technology is the logical answer to the problem of how time-consuming regulatory compliance has become. “Computers do certain things better than people do,” he says. “Technology can help take repetitive tasks off people’s plates.”

Specialized expertise

A few resourceful community banks have also begun extending their own special in-house capabilities to other community banks. That’s what CenterState Bank began doing early this year after developing an internal derivatives trading department.

Last year CenterState Bank developed in-house expertise to safely offer long-term fixed-rate commercial loans to its small-business customers. Several of the bank’s commercial customers with floating-rate loans, worried about an upturn in interest rates that would cause their loan payments to rise, had begun requesting fixed-rate financing with longer terms running 10 and 15 years, Nichols says. Responding to that demand, the bank was able to convert many of its floating-rate commercial loans into longer-term fixed-rate loans by learning how to safely hedge the extra interest rate risk with offsetting derivatives contracts.

“It’s not risky for us because we have experience managing an interest-rate hedge book,” Nichols says.

To do all of that, however, the bank has had to build a significant legal, compliance and marketing infrastructure to handle the derivatives underwriting, accounting and new Dodd-Frank Act requirements. That required a significant capital investment. So in January, CenterState Bank decided to share its processes and expertise with other community banks.

“We thought that since we’d spent all this money on research, technology, legal documentation and the gathering of experts, we might as well spread that cost over a larger base,” Nichols says.

“We’ve found that the more open we are and the more ideas we put out there, the more ideas come back to us.”
—Chris Nichols, CenterState Bank

Now through the bank’s new Assumable Rate Conversion Program, CenterState Bank has begun allowing other community banks to access its in-house hedge operations. Designed as a turnkey program, the ARC Program allows community banks to offer fixed-rate commercial loans to their customer base without shouldering the resulting additional interest rate risk, Nichols says. Instead, through its derivatives trading capabilities, CenterState Bank can assume the interest rate risk for those fixed-rate commercial loans, which otherwise remain on the balance sheets of the originating banks.

At press time, Nichols said CenterState Bank had more than two dozen contacts pending to provide its hedging service to other community banks.

For both Swedish-American State Bank and CenterState Bank developing new product and service models for other community banks has expanded the boundaries of what they believe is possible in operating as community banks. It has also boosted their faith in their own abilities to successfully innovate.

“We’ve found that the more open we are and the more ideas we put out there, the more ideas come back to us,” Nichols says. “While we are creating more fixed-rate loan competition in our local markets, what we are really learning is how to innovate—it is that skill that will keep us ahead of competition from larger banks and delivering quality service to customers.”

For Johnson, developing products like to reduce the time and money spent on regulatory compliance will be important to keeping community banks focused on doing what they do best—serving the financial needs of their customers and communities.

“My granddad Herb always tells me how much more fun banking was in the good old days,” Johnson offers. By having community banks continue to innovate in all kinds of ways to solve all sorts of new challenges, he also plans to be able to tell his own grandson that “being a community banker is a noble and fun career choice.”

Elizabeth Judd is a writer in Maryland.