ST. LOUIS — Dorothy Savarese knows as well as any community banker the frustrations of dealing with mounting regulation.

The Show Me state was a fitting location for her opening speech at the Federal Reserve's first research conference on community banking, where she argued empirical studies can illuminate regulatory burdens — and their broader consequences — for policymakers.

Before her talk, Savarese, the chairman, president and chief executive of Cape Cod Five Cents Savings Bank in Orleans, Mass., sat down with American Banker to discuss her message and the challenges running a $2.4 billion-asset thrift. The following is an edited transcript of that conversation.

What should attendees take away from this conference?
Community banks are a unique model that is critical to the country in terms of small businesses, farms, jobs and communities. The research that is being done [by academics presenting at the conference] will help provide critical support for that premise. Community bankers may believe that, but it is critical that the regulators and all of the stakeholders do, too.

If you do believe it is a critical model, it is important that you understand the challenges that community banks face. All stakeholders — legislators, policy makers, regulators and researchers — need to come together in a way that brings creativity and innovation to … provide a framework that promotes safety and soundness and allows community banks to adapt to the changing world.

How do you view the regulatory relationship?
We've been very, very lucky. In the Northeast, and Massachusetts in particular, we've been blessed with a string of outstanding state banking commissioners. … There has been vision, understanding and leadership at the state level, which has been helpful to us. Our relationship with the FDIC has always been very constructive.

The challenge has been with the implementation of Dodd-Frank and a variety of other initiatives. I'm not blaming the regulators for trying to do their job but the problem is the unintended consequences of one-size-fits all and an absolute lack of clarity of what is happening with the layering on of regulations. And there has been a real lack of understanding of what happens at the community bank level in terms of the costs.

It has been incredibly encouraging to see a growing desire to understand that, which is a sea change. I think there is desire but it is important that the regulators get together and coordinate. Research on its own is terrific, but it needs to be done in a way so it is more congruent, in terms of legislative and judicial interpretation. That is a challenge.

How do you manage Cape Cod Five Cents Savings in this environment?
Every bank has to find its own way. One thing is the excessive cost of complying. It is unbelievable. It is very difficult to keep our efficiency ratio low.

We have people who reengineered our mortgage processes for secondary markets and compliance concerns. But because of HMDA and RESPA, we have checkers who check the checkers. Okay, that's fine. Then we actually have another third layer of checkers who check the checkers who check the checkers. Then we literally have two outside consulting firms that check again. That's a lot of layering and a lot of expense.

We completely agree with the objectives of transparency, full disclosure and fairness. Those are our core values. I want to challenge regulators to come up with new, innovative ideas of getting the same effect by bringing more technology into the process.

There was one piece of regulation introduced last year, where we got three divergent opinions — from consultants, the trade association and the government — on what to do. Because we're a very conservative organization that didn't want to slow up delivery of mortgages, we took the most conservative route … and it was the most expensive route. That happens constantly.

You also have rule making that keeps changing prior to the due date. That uncertainty makes it almost impossible to plan. How do you know how to allocate resources and how your processes will go if you don't know where the expectations are going?

How do you grow revenue and the bottom line?
It is the fundamental question, particularly in the context of the continued downturn and a low interest rate environment. The challenge I issue to community banks … is that we need to develop with a great deal of creativity new models that adapt to the changing world while providing value and finding niches in uncontested space. You have to do it in a way where revenue and expenses are appropriately balanced, yet at the same time you have to adhere to your core values as a community bank.

For us, the issue is making sure we have deep insights into our customers and their changing needs, and moving ahead of that and providing value. If you do that, you can develop a business model that works. You can't do it around the margins. You have to step back and look at the whole picture in an open and inquiring way.

How do you do that?
You have to continually reinvent. As the market leader in our space, the minute we introduce something there are imitators. If you don't keep leading…someone is going to imitate you and move ahead. Sometimes it is a matter of taking something other people are doing and doing it better.

I listen to our customers. About eight years ago we opened our trust department. We had been referring them to another large trust institution and customers were saying "please don't do that to us." I worked with our board and our team, knowing it would take some time to get it off the ground. … At one point we were one of the fastest growing trust departments in the country. Now we have over $700 million [in assets under management].

You have to understand the unique needs of your area.

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