Competitive, economic and regulatory pressures are driving community bankers around the country to make strategic decisions about the future of retail banking. To overcome the challenges and leverage the opportunities 2016 presents, they’re increasing efficiency, making acquisitions and expanding business lines.
We spoke to the leaders of four banks with assets ranging from $200 million to $1.7 billion about key trends and choices for the coming year. They were Jeffrey Agee, chairman and CEO of First Citizens National Bank of Dyersburg, Tenn.; Ron Green, president and CEO of Oregon Pacific Bank, based in Florence, Ore.; Dave Nelson, CEO of West Bank, West Des Moines, Iowa; and William J. Pasenelli, president and CEO of Community Bank of the Chesapeake in Waldorf, Md.
Q: What are some retail banking challenges you face going into 2016?
Nelson: In retail banking, compared to community business banking, the margins are a lot narrower. So, to do well financially, you have to have a good critical mass of business and be very cost-conscious. With the escalating expense of regulatory requirements, it’s becoming more difficult to profitably serve customers. So, with a focus on expense control, we are starting to implement things such as cash recycling equipment to make our teller lines more efficient. We’ll be introducing Interactive Teller Machines (ITMs) with video links soon.
Agee: In our markets, especially in west Tennessee where our core assets are, the unemployment rates are above the national average. Loan growth is modest. With economic conditions and global uncertainty, we’re seeing a lot of people continue to put deposits in our banks because other alternatives are risky, or seem to be, in this environment.
Pasenelli: We have a host of new regulations, so deciding which businesses to focus on is important because we can’t build the infrastructure to be compliant and operationally excellent in everything. We have to face that challenge and do some hard thinking about that. Second is cybersecurity in all channels, whether that’s wires, Internet banking, in-branch transactions, everything from EMV cards to hackers trying to get into the website. There’s also the growth of non-banks, which in our market is certainly strong. A lot of individual customers are moving away from using traditional bank services, and that’s hampering growth.
Green: We cannot ignore the changing demographics and how different generational groups expect to access financial services. Our main office is in a predominantly retirement community, and it’s interesting and exciting to see today’s retirees move into Florence, Oregon, all with iPhones in their hands, all wanting to have mobile capture and online and mobile banking. We provide all those services, but our biggest challenge is going to be attracting and retaining the Millennials and Generation X demographics, particularly now as we’ve expanded into the Eugene market, which is a much more economically and demographically diverse community than in Florence.
Q: What opportunities do you see coming your way in 2016?
Agee: We’re seeing home appreciation finally take place again. One of the positives of this low-rate environment is that it’s still very enticing for people to purchase a home, and there are opportunities for first-time homeowners. The regulations are putting up extreme barriers, but still there’s an opportunity for us in that sector. That also enables you to consider some home equity loans. We see that as helping us with fee income and putting some of those loans on our books. We love small business lending, but small businesses are very challenged right now as they go through this post-recession recovery.
Pasenelli: Our business model primarily focuses on small- and medium-sized businesses and professionals, so not truly mass-market retail. As the cost of labor goes up, I think we have some opportunities to offer our customers ways to save on labor, things like lockbox, account reconciliation, ACH, positive pay and payroll services. Those services that can appeal to the small businessperson trying to keep headcount down are going to be part of our marketing focus.
Nelson: In the marketplaces where we do business, Iowa and southern Minnesota, the housing market in general has continued to improve, which is a real positive driver for the community economies as a whole. In all our communities, we’re approaching full employment. Maybe to offset that, we are anticipating an overall decline in farm income this season. The yields are projected to be good, but commodity prices have fallen dramatically. The farmers just are not going to make as much money off the crop as they have in the past, and that of course affects the number of new pickups, for example, that are purchased.
Q: What specific regulatory issues are attracting your attention?
Green: The Bank Secrecy Act (BSA). We aren’t near a border and don’t deal with any international business, so we’ve always viewed ourselves as being on the lower end of BSA and money laundering risk. Regulators, not specifically about us but in general, think otherwise. There has been a heightened level of attention in our industry with BSA, and in the last 12 months, we’ve had to add about one and a half full-time equivalents to manage BSA to meet regulators’ expectations.
Pasenelli: We exited residential mortgage in the spring of 2015. That was a regulatory- related decision, and we’re satisfied we made the right decision for our bank. Other banks have different opportunities and different costs, but for our particular institution, it’s the right call. We also have the ongoing cost of the Affordable Care Act, which is making the marginal cost of hiring an extra employee quite a bit more than our per-dollar compensation. The health care expense of employees is continuing to move up, and that makes us very cost-conscious in headcount.
Q: What are your plans for the future?
Agee: We have already earmarked some banks we want to acquire in the state of Tennessee. We love to look at accretive acquisitions; that’s critical to us. We will continue to acquire and leverage off the strong infrastructure in our home office.
Green: We’ll stay focused on business and professional banking, which for us is basically small business. On the retail consumer banking side, we are looking to grow wealth management. We are in the process of forming a registered investment advisor, a separate wholly owned subsidiary of the bank. We currently offer investment services within the bank, but we’re going to spin that out and strongly promote that we can provide localized expert service on building and growing wealth. Whether you have wealth or would like to have wealth, financial advice can help. We also bank a lot of sole proprietors, single-member LLCs. We can provide localized expert service for these business owners and employees and perhaps their directed employee retirement funds.
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