Riding the Winds of Change

There’s no doubt about it: Community banks are going for growth in 2017. For ICBA’s 2016 State of Community Banking Survey, we asked members to dust off their crystal balls, outline their goals for the coming year and explain how they plan to meet them. As they tell us, they’re navigating current challenges while keeping their eyes firmly fixed on the future

By Nancy Crotti

When ICBA carried out its annual State of Community Banking Survey for 2016 last October, the presidential election was still weeks away. Respondents most commonly cited regulation as their biggest challenge for 2017, followed by boosting earnings and increasing loans.

After the shock election of Donald Trump as president and continued Republican control of Congress, the coming year might have some welcome surprises for community bankers in terms of regulation rollbacks. The community banking landscape is dotted with other hurdles, however, such as low interest rates, competition from both traditional banks and FinTech companies, evolving payments technology and the varying demands of customers from different generations.
ICBA’s survey shows that community bankers are not just facing but embracing these challenges, using them as springboards for growth throughout 2017.

And grow they will. Of the 100 bankers who responded to the survey, 23 of them put earnings growth at the top of their list of goals for the coming year, followed by 18 listing loan growth, eight targeting deposit growth, and five seeking an improved net interest margin.
On the coming pages, we look at respondents’ priorities for the coming year, from adapting to regulation and growing lending to meeting increased customer demand for digital products.

■ Technology

Making room for the future

A rural Alabama bank is streamlining costs to ensure it keeps up with the crowd
In a three-county rural area of northeast Alabama, 18 banks compete for the business of 150,000 people. Fifteen are community banks, and the whole crowd is vying for a total of $2 billion in deposits.
Birmingham super-regional Regions Bank dominates the market, followed by community bank First Southern State Bank in Stevenson, according to the latter’s president and CEO, Mike Ellenburg. First Southern has grown from $70 million in assets to $375 million in Ellenburg’s 20 years at the helm, and technology is playing an important part in this growth.
First Southern already offers e-statements and internet and mobile banking, and it plans to add mobile deposits this year, possibly eschewing passwords for fingerprint ID. To attract millennial customers, it will spend more on technology, update its website and seek a millennial to be its first marketing officer.
To gain efficiencies and fund these changes, First Southern is renegotiating its core provider contract and will try to convert more customers to e-statements. It also has no Facebook page, and it splits marketing duties among employees.
“Not being a big bank, not having a big budget, we need to find a way to work [technology] in,” Ellenburg said. “I think we can get a lot of things done in 2017.”
—Nancy Crotti

Dealing with regulation

Regulation has been a thorn in many community bankers’ sides since the financial crash. This came out strongly in the survey, with 58 percent of respondents naming compliance as their biggest challenge in 2017. Sixty-two percent expect to increase spending on it by at least 5 percent in 2017, 38 percent expect to spend about the same, and not a single one expects to spend less.

Pendleton Community Bank in Franklin, W.Va., formed a compliance committee to help the director of compliance address regulatory requirements. The $280 million-asset bank also added one-and-a-half full-time equivalent (FTE) positions in the past few years to help its compliance officer keep up with compliance and audit issues, according to President and CEO William A. (“Bill”) Loving. “That doesn’t sound like a lot, but for a small institution, it is,” Loving said in an early November interview. “We’ll find out if it helped. We have a compliance exam coming up in the fourth quarter.”

Pendleton has a loan production office and six branches spread over eastern West Virginia and northwestern Virginia. Loving’s concerns with regulation in 2017? “Everything,” he said with a rueful laugh. “It’s death by a thousand cuts.”

Loving was interviewed shortly before the election, and Christopher Annas, CEO of Meridian Bank in Malvern. Pa., a few days after. Annas said his bank had one-and-a-half FTEs devoted to compliance four years ago. Now, it has seven. Five of them earn more than $100,000 a year because their skills are in such demand.

Annas’s outlook on regulation has improved considerably since the election. He said he is hopeful that Dodd-Frank will be repealed or significantly amended under the new administration.

That would surely save time and money, but it might not happen right away. In the meantime, banks large and small are focused on increasing earnings and loan volume.

■ Survey result

What are your bank’s greatest business challenges in 2017?

43% Increasing loans
44% Increasing earnings
15% Reducing expenses
58% Complying with regulations
5% Meeting capital requirements
35% Keeping up with technology needs or advancements
25% Addressing data security
26% Attracting and retaining qualified staff
17% Planning for succession
11% Other

Stiff competition for loans

Boosting earnings came in at No. 2 among respondents’ top three business challenges, almost tied with increasing loans. A near-unanimous 99 percent said lending will likely drive their banks’ profitability in 2017, followed by wealth management services at 11 percent, credit/debit card services at 9 percent, and payments and insurance sales tied at 4 percent each.

At 26 percent, commercial real estate lending is the activity respondents anticipate will grow the most at their banks in 2017. It was followed by small-business and agriculture loans, tied at 22 percent; residential mortgages at 17 percent; and commercial/industrial lending at 8 percent. Whatever the focus, they’ll build on what they already do: Nearly 89 percent said they would grow an existing line of business to increase income.

Those relying on lending to boost earnings face stiff competition in many areas of the country.

“If there’s any loan out there that’s of any quality, there’s a gang of people chasing it, and they’re aggressive as heck about pricing, structure and just doing anything to get the business,” said Doug Hile, CEO of KleinBank in Chaska, Minn. “That also impacts your existing customers, because they’re being solicited aggressively as well. It’s an issue of too many banks and not enough loans.”

With $1.95 billion in assets, KleinBank has 21 offices spread from the northern and southwestern suburbs of Minneapolis to rural areas of the state. Fifteen percent of its loan portfolio is in agriculture, making KleinBank one of the larger ag lenders in a region that specializes in grains and dairy products.

“My ag people right now are telling me that this is going to be a pretty good year, a pretty decent year for many farmers,” Hile said. “They’re having record years on yields in our part of the world, so that’s been tremendous. But that puts pressure
on prices.”

He added that KleinBank has been focusing on increasing ag lending because it helps it diversify its loan portfolio. There have also been opportunities for the bank outside of agriculture; the overall regional economy is on the upswing, with a falling unemployment rate, increases in job creation and some business expansions.

Being a larger community bank enables KleinBank to compete for bigger loans than others in the area can. Hile also noted that some big-bank customers who have grown tired of the lack of responsiveness and personal attention from larger banks have been migrating to KleinBank, helping boost its loan portfolio by
10 to 15 percent in the past two years.

“We’re very pleased with that,” Hile said. “It comes from getting business away from the other guys, and we don’t really target their customers. Their customers come to us through referral sources.”

It also helps to have big hitters in the world of lending on your staff. Meridian Bank scooped up several top-notch loan officers in the employment shake-up wrought by a series of recent bank acquisitions in Pennsylvania, namely North Carolina giant BB&T’s purchases of Susquehanna Bancshares and National Penn Bancshares in 2015 and 2016, respectively.

“We’ve got some great lenders and the team has done very, very well,” Annas said. “We decided to hire these people and it’s working.” He’s expecting Meridian to see 25 percent organic growth in commercial, industrial, real estate and development loans in 2017.

Meridian is growing in other ways, too. Until a couple of years ago, it was a $600 million bank with a mortgage company and two branches. The bank now has $740 million in assets, raised $14 million in equity in March, and is planning on going public toward the end of 2017.

Across the country in Oakland, Calif., Tom Duryea, CEO of Summit Bank, plans to hire relationship loan officers to keep up with increasing demand to drive stronger return on assets (ROA) in the second half of this year.


Before you establish growth targets, are you relevant in the eyes of your
millennial customers?

Loans are the primary growth revenue driver for a bank. Millennials are the largest generation to be born in the history of the United States. What products and services are you offering to attract them? Digitizing offerings so they are available on a mobile phone is a key driver, but perhaps the biggest driver of all is opportunity. A $30 trillion opportunity. Millennials are in line to inherit $30 trillion from their Baby Boomer parents. How they decide to bank this money—or not bank this money—will largely determine the success or failure of community banks. Before you can target growth, a bigger question is, “How am I positioning my bank to be relevant and offer value compared with other choices to earn millennial business?”

— Keith Nolan, Vice President, Association Management, FIS Retail Payments

Eyes on technology

Compliance and growth may be perennial hot topics in ICBA surveys, but this year also found bankers concentrating on the challenges of keeping up with banking technology for the benefit of both customers and operations.

Mobile banking topped the technology wish list, followed by remote deposit capture, updating core software, contracting with a new systems provider or renegotiating with an existing one. And while many community banks have already invested in technology such as online and mobile banking, data security will be a perpetual concern; respondents named it the fifth biggest challenge overall for 2017, tied with attracting and retaining qualified staff.

The cost of digital technology and when to deploy it is a key issue for First Southern State Bank in Stevenson, Ala., a small, rural bank with assets of $375 million and 95 FTE employees.

“I’m one of those guys who’s been in it for 41 years in banking,” CEO and President Mike Ellenburg said. “I’m realizing we’ve got to do something different than what we’ve been doing.” (See “Making room for the future”.)

So has Brad Tidwell, president and CEO of Citizens National Bank, which has 29 branches and assets of $1.75 billion. Based in Henderson, Texas, the bank’s markets range in size from a town of 454 to a city of 100,000. Its customers want personal service, but they also demand online and mobile banking.

“Learning to adapt to the new technologies has been critical. I think we’re doing pretty well with that, but I think that it will be a continual challenge,” Tidwell said. “We’ve got to be as efficient as we can, to adapt to a lower net interest margin environment, and we’ve got to use technology more effectively. We must always keep the customer in mind, and it’s got to be a win-win for the customer and the bank.”

Citizens plans to put considerable time and resources into mobile. “We believe that the smartphone is really key to competing in the future, not just with the banks but with the FinTechs,” Tidwell said. “While we have a pretty good mobile platform today, we know it can be meaningfully better.”

Pendleton Community Bank has also made a big investment in technology, both for customer use and for bank operations. That has helped the bank reach its 58 percent efficiency rating, according to Loving.

At KleinBank, Hile and his colleagues are evaluating whether the bank has the right systems provider relationship to take it into the future. It has operated without a long-term contract for 30 years, but now that core technologies have become fairly standardized and internet technologies are becoming costlier, Hile believes it’s time to reevaluate. “This is a big deal for us,” he said.

Trimming the branches

Across the country, the shift away from branch growth continues. Eighty-eight percent of respondents said they had no plans to add new locations in 2017, and just 9 percent said they would add some. Three percent plan to close branches.

Although Citizens bought five former Bank of America branches in January 2015, it’s seen a drop in brick-and-mortar business at the same time as takings on the digital side increase. It’s therefore working on transforming how its branch employees operate in order to increase efficiencies and boost customer satisfaction.

Meridian Bank, meanwhile, is bucking the trend. It opened two branches in 2016 and plans to open two more this year, one in central Philadelphia and one in southern New Jersey. “We’re trying to … build our market area with some recognition that people still want to have a physical location somewhere where they can get to it without too much trouble,” Annas said.

No need for ATMs

Meridian was an early adopter of online banking and never added ATMs, choosing instead to refund fees charged to customers who use other banks’ machines. This was partly because most of the good locations for ATMs were already taken when the bank debuted in 2004. In any case, Annas said, millennials are more likely to ask for cash back from a debit card transaction than to visit an ATM.

No matter their location or size, today’s community banks face many of the same challenges: low interest rates, compressed margins, strong competition, and a changing technological and generational landscape. Yet they are all finding ways to cope and grow their banks.

Duryea said success is about more than just navigating red tape and boosting the bottom line. “Always remember that your people are your greatest resource, and being able to attract, develop and reward them is key to any successful and sustainable community bank,” he said. “If our community bank is not successful, then we can’t live up to our charter to ‘do for the greater good’ of the communities we are fortunate to serve.”

■ Snapshot

A tale of two banks

Despite operating in the same state, these two California banks demonstrate the diversity of experience in the community banking world
California’s economy may have surpassed that of France, but it’s not a gold rush for everyone. A bank’s fortunes can be as dependent on geography as they are on its product offering.

Tom Duryea, CEO of Summit Bank in Oakland, described the nine-county San Francisco Bay Area’s economy as “white hot.” Median home prices range from $600,000 to $1.3 million, and many San Francisco businesses are moving to Oakland in search of cheaper real estate.

“The number of cranes that are up in the air building, I’ve never seen anything in my life that was close to this,” said Duryea, a Bay Area native.

Competition isn’t a big factor for Summit, one of 23 publicly traded community banks in an area of more than 7 million people. The $250 million-asset, three-branch bank has 30 employees and a 60 percent efficiency ratio in spite of pressure on profits from low interest rates.

“It all comes down to having a great team,” Duryea said. “Your team members must have a deep, overriding commitment to reinvest and improve the ways we
do our business.”

The Bank of Rio Vista, located between San Francisco and Sacramento, has lots in common with Summit Bank: three branches,
a loan office, 35 employees and assets of $220 million. That’s where the similarities end.\

The rural city of Rio Vista has one accountant, one attorney, and two dentists. Half of its 8,000 residents are retired government or union employees and loyal credit union members who moved here to take advantage of the city’s low housing prices but don’t necessarily shop locally, according to bank CEO David Greiner.

The economy, which once thrived on natural gas exploration and shipping, now lags behind its neighbors, Lodi and Fairfield, for commerce and agricultural production. To adapt to the community’s changing circumstances, the bank’s leaders decided to change direction and recently received certification as a Community Development Financial Institution, dedicating its lending resources to helping economically disadvantaged people and small businesses.

“We have to run the bank given the resources that we have,” Greiner said. “You’re always trying to make it better, but you just have to accept reality in who you are and [that] this is how you’re going to do business in the years ahead.”
—Nancy Crotti

Words from the wise

Survey respondents on how to find success
in the coming year

William Loving, CEO and president,
Pendleton Community Bank, Franklin, W.Va.

“One thing we’ve traditionally done is, we’ve stuck to traditional banking. Yet, we try to provide all delivery channels necessary to meet the needs of the older generation as well as the new generation.”

Mike Ellenburg, CEO and president,
First Southern State Bank, Stevenson, Ala.

“You need to find a way to recognize your challenges sooner rather than later and then try to get a plan.”

David Greiner, CEO,
Bank of Rio Vista, Rio Vista, Calif.

“It’s really about knowing who you are, accepting who you are, growing incrementally, trying to do things a little better every year, staying with your core values and not going outside that to please other parties.”

Tom Duryea, CEO,
Summit Bank, Oakland, Calif.

“It takes a great team to succeed in this environment, and your team members must have a deep overriding commitment to always find new and better ways to reinvent and improve ways to optimally conduct your business, not just because they are expected to but because they just can’t stop themselves. This is a key component of our Summit Bank culture.”

■ Operations

Branch booster

Citizens National Bank is adopting a universal banker model
to create efficiencies at its branches

Like many community banks, the $1.75 billion-asset Citizens National Bank in Henderson, Texas, has seen tremendous growth in online and mobile traffic and a concurrent dive in in-branch traffic at its 29 branches.

To adapt to this new landscape, it launched a three-year program in 2016 to move from the traditional teller/new accounts model to a universal banker model, in which branch employees fulfill multiple roles. Citizens is also deploying teller cash recyclers in its branches to speed transactions. Recyclers can accept, authenticate and sort by denomination. They count money only once, rather than the typical two times that a teller does.

Brad Tidwell, president and CEO, believes branch employees enjoy being busier. And while the bank is not proactively trying to reduce headcount, he said the model will likely lead to fewer employees.

“[Our customers] want the best of both worlds.”
—Brad Tidwell,
Citizens National Bank

Citizens’ competitors in the highly competitive east and central Texas markets—there are six community banks within 60 miles of Henderson—are not using the universal banker model. Citizens converted three branches as a pilot in 2015 and started converting five more in December 2016. It also partnered with Atlanta-based branch design company Adrenaline to give its locations a fresh new look.

Citizens has learned that customers in smaller communities want personal service and the convenience of online and mobile banking.
“They want the best of both worlds,” Tidwell said. “We’ve got to really balance that for our customers.”

—Nancy Crotti

Nancy Crotti is a freelance writer
in Minnesota.