Top concerns and growth strategies of community banks: Part I

This article is the first in a two-part series on top concerns and growth strategies of community banks.

Regulatory compliance. Loan growth. Risk management. These are all phrases that resonate with community bankers. Data from Bank Director’s 2014 Growth Strategy Survey in August confirms that these are bankers’ greatest concerns.

Source: 2014 Growth Strategy Survey

The survey participants included 145 independent directors and senior executives from U.S. banks of all sizes. Approximately half of the banks that participated in the survey were publicly traded and were focused on a mix of retail and commercial banking.

Regulatory Compliance

The greatest business concerns for the banks were regulatory compliance, growing loans and managing risk, with regulatory compliance topping the list by a wide margin. Community bankers are not keeping these concerns to themselves. Last month, community bankers from all over the United States asked the Senate for regulatory relief.

Of those asking for regulatory relief, many argued that banking regulations are hurting the economy. Jeff Plage, chairman of the American Bankers Association (ABA), argued that regulations hurt the economy through less credit in local communities. He notes, “Less credit means few jobs, lower income for workers and less economic growth.”

Growing Loans

Growing loans was also a concern for bankers. As competition is increasing among community banks, it is now necessary to help your bank stand out from the crowd. Bill Early, president of PlumDog Financial, maintains that he often asks bankers, “What sets your institution apart from competitors?” While common answers include great service, multiple locations, developing personal relationships and competitive rates, Early argues that these factors don’t necessarily help customers choose a bank because every bank claims this.

To attract new customers and grow loans, Early suggests a two-step process: First, ask customers about their needs by holding focus groups or distributing online surveys, then use that information to address the specific needs of your community.

Managing Risk

Risk management is also a trending topic, especially as banks are devoting more resources to this area, including hiring a chief risk management officer. Risk management typically involves the following steps:

1. Risk analysis. This involves an in-depth look into all aspects of the organization—staffing, regulations, products, systems, etc.

2. Risk assessment. This requires assessing all risk, not in isolation, but rather involving the people on the ground who actually know where problems can occur.

3. Risk management reporting. After an often lengthy and time-consuming process of analyzing and assessing risk in your spreadsheet-based risk management practices, it is then necessary to prepare the report to present to management and the Board detailing potential holes.

This can be a lengthy and complex process, which makes it difficult to discern when you should focus on managing risk versus focusing on other responsibilities. Aside from time constraints and complexity, there are other limitations with risk management, especially for banks utilizing spreadsheets:

• Data integrity. Because the data is often stored on a spreadsheet application, not in a database, it requires manual entry, which leaves room for human error.

• Data volume. Spreadsheets are equipped to handle large amounts of data, but it can be crippling if your data volume for an entire portfolio slows down formulas or crashes the system.

• Data storage. Because data is not centrally stored, it is difficult for multiple users to access it at once, therefore making it difficult to verify that loan underwriting standards are consistently applied.

• Data integration. Many types of loans require a global cash flow analysis. Spreadsheets make it difficult to readily integrate from disparate data sources and can lead to many common mistakes.

These concerns are not unfounded. Regulatory compliance, loan growth, and risk management are all pressing issues for banks in 2014. Part II of this article will focus on growth strategies, using data from Bank Director’s 2014 Growth Strategy Survey.