Today's community banker: holding on to cautious optimism

RMA Journal, The, April, 2004 by John Ziegelbauer

A survey conducted by Grant Thornton found that community bankers manage risks and face increased corporate governance regulations with a brave face. Overall, 76% of respondents feel optimism in 2004.

Community bankers continue to face a range of issues, from the costs and pressures associated with corporate governance to managing the varied risks of the world of financial services. In 2003, these traditional operational risks were compounded by a number of natural disasters and a multistate blackout. According to Grant Thornton's Eleventh Annual Survey of Community Bank Executives, these bankers are facing these risks and challenges with a cautiously optimistic outlook.

The banking industry. When assessing their own industry, 76% believe the general business outlook in 2004 is good to excellent. Bankers' optimism has deflated since 2003, however. In last year's survey, 37% expected a very good to excellent year in 2003, but this year only 18% anticipate the same for 2004. And while 19% had a gloomy outlook (fair or poor) for 2003, some 24% fear 2004 will be less than good for community banking.

The economy. An economy slowly emerging from a slump, increasing competition from both inside and outside the industry, and less demand for commercial loans are some factors that may have caused community bankers' optimism to wane in the past year.

Although the economy seems to be gaining momentum, the bankers' outlook for the state of the economy in 2004 is only moderately optimistic. Half (49%) indicate the outlook for the economy in 2004 is good, while only 11% feel it is very good or excellent. Four in 10 expect the 2004 economy to be fair or poor. Community bankers' pessimism is not consistent throughout: Rural bankers (46%) are more likely to have a negative outlook than their suburban (36%) counterparts.

Loan demand, delinquencies, and collateral values. When asked how the overall national climate affects their business, community bankers stay true to their business outlook. Pessimists (those with a fair or poor outlook) are more likely to foretell increasing delinquencies (33% vs. 21% of optimists), while optimists (those with a very good or excellent outlook) are more likely to predict increased loan demand (53% vs. 36% of pessimists).

Some 20% of pessimists expect collateral values to decline, compared to only 7% of optimists. And 19% of pessimists--compared to only 5% of optimists--expect core deposits to decrease. Meanwhile, 26% of optimists (vs. only 8% of pessimists) will look to raise more capital in 2004.

Optimists and pessimists agree on one point, however: Both are equally likely (41%) to anticipate an increase in loan-to-deposit ratios.

Managing the Risks

Confronted by forces of nature, including hurricanes, fires, and mudslides, bankers in 2003 were reminded of the importance of an up-to-date business continuity plan, but are not losing sight of the need for effective risk management procedures.

Keeping the business of banking operational after a disaster is an important issue to the success of 68% of community bankers. And the majority (58%) express confidence in their performance--an increase from last year (48%).

Managing risks such as credit, interest rate, financial, investment, cash flow, privacy, technology, and security is also integral to community banks' safe and sound operations.

Since the fundamental business of banking is holding savings and making loans, more than nine in 10 bankers cite "controlling credit risks" (93%) and "managing interest rate risks" (90%) as important to their success. Bankers have learned from their experiences in these areas, with nearly three-quarters indicating they are confident in their banks' performance in both of these areas of risk management.

Community bankers are also responding to regulation such as the USA Patriot Act, Sarbanes-Oxley (SOX), and continued industry regulation and oversight. More than eight in 10 believe "protecting customers' privacy" (88%) and "complying with regulations" (82%), while almost as many (78%) cite "assuring quality of financial reporting" (78%) as important to their success. About three-quarters of bankers are confident in their performance in these areas.

Privacy issues, overall, may be an area bankers will need to pay special attention to in the future. The survey found that although 76% of community bankers express confidence in their ability to protect customers' privacy, only 53% are confident in their banks' ability to control technology risk or to ensure the security of Internet services. By strengthening their performance in these areas, community bankers will be able to ensure customers both privacy and security.

Revenue generation is another area where bankers lack confidence. Some 87% consider "assuring reliability of and maximizing revenues" to be important to continued success, but only 48% say they are confident in their performance. This may be why so many (84%) also identify developing new sources of revenue as important