Differentiation is the Key to Community Bank Survival

SAN DIEGO — A panel of community and regional bank leaders made the case that small banks can succeed by differentiating themselves from competitors in a climate of increased regulation and persistently low interest rates.

The panel of chief executives, assembled as part of the American Bankers Association's annual convention, made it abundantly clear that banks must learn to do more with limited resources. Their message to the attendees was to be willing to embrace change and recognize that it takes time to develop the right reputation.

Panelists also provided examples of how they were setting the stage for future growth by investing more in commercial lending and technology. And they emphasized the importance of compliance training and finding ways to energize employees at a time when challenges can appear insurmountable.

"We have to understand that to stay the same is not possible and that if you try and hunker down the storm will change you," said Ray Davis, president and chief executive at the $11.5 billion-asset Umpqua Holdings (UMPQ) in Portland, Ore. Banks "must have a value proposition built on more than just price."

"The resources of the past may not get us to the future," added James Smith, the chairman and chief executive at the $19.7 billion-asset Webster Financial (WBS) in Waterbury, Conn. "So we have to do more with the resources that we have."

Smith spoke about the importance of a value-driven corporate culture. Following the financial crisis, the company declared a moratorium on foreclosures, and the result was that 1,300 families were able to remain in their homes. "You make your name with clients when times are tough, and we believe that can be our competitive differentiator," he said.

For Webster, the path forward includes fine-tuning how it allocates funding. It has already closed a number of branches and had devoted more resources to technology.

"We're shifting investment to the electronic infrastructure … and we're investing in small business and private banking where we can bring in the totality of the relationship," Smith added. "In the end, we're not going to significantly reduce the number of branches that we have but they will be smaller, better located, and better outfitted."

Discipline is critical to avoiding the credit blow ups that felled numerous banks in recent years, panelists said. "The competitiveness makes it even harder" to grow with low interest rates, Davis said. "It will be interesting to see how strong the self-discipline is and how many people are willing to break away with structure."

Another key element of the panel centered on finding ways to run a smarter bank, particularly when dealing with compliance demands. The $214 million-asset Four Corners Community Bank in Farmington, N.M., has been working to train more of its middle-management supervisors to become the "compliance officers of the future," said Sheila Mathews, the bank's president and chief executive.

"It's a shame that we're looking for compliance [staff] rather than customer-facing employees," Mathews lamented. The bank is also encouraging its younger employees and information-technology staff to sit in on senior management and board meetings.

"They have a different thought process and lifestyle needs," she said. "Bringing them in is critical, and they drive the technology."

R. Daniel Blanton, the president and chief executive at the $1.7 billion-asset Georgia Bank & Trust in Augusta, Ga., said that until midyear, the bank had been operating defensively, acting as though it was under a regulatory order when it was not.

"I think early in the cycle they referred to Atlanta as Chernobyl," Blanton quipped, since Georgia has had more banks fail that any other state since 2008. "But in the second quarter we looked up and realized that we had our best quarter ever … so we told our staff that it was time to go on offense. There was a great sigh of relief that we were telling them it was okay to move forward."

For Georgia Bank, the goal was to motivate employees who had been held in a "World War I foxhole for three years," he said. Management surprised them with a dedicated day to visit existing clients and prospects. "At the end of the day we met for cocktails," Blanton said. "They came back energized. They wanted to go back to being bankers. … Now we're going to do this every six months."

A final piece of advice from the panelists: community banks cannot win business from their larger competitors based solely on price.

"We try to convince our people, especially our loan officers, to not introduce rate when they walk in the door," Davis said. "I want them to sell the culture of the company. People will pay up for quality to a point. There are some [borrowers] who are looking for the Kmart bank, and we tell our people to just move on" in those situations.

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